The House of Representatives has begun floor debate today on Rep. Barney Frank's (D.-Mass.) proposed comprehensive plan for financial- services reform.
Perhaps the most controversial aspect of the bill would require brokers, and any other financial professionals holding themselves out as advice-givers, to adhere to a fiduciary standard similar to that of registered investment advisors.
The fiduciary standard dictates a relationship of trust, embracing due care, loyalty and good faith. Under current law, brokers are not required to register as RIAs and are therefore not subject to the fiduciary standard.
The Senate has also published a reform plan, proposed by Sen. Chris Dodd (D.-Conn.); but it won't be close to voting stage until January 2010 at the earliest. As to the fiduciary standard issue, the Senate plan is tougher.
The biggest controversy — and the subject of a red-hot industry debate — is whether brokers would be required to adhere to the identical principles-based standard of care that RIAs are held to under the Investment Advisers Act of 1940 or to a weaker fiduciary standard.
Currently brokers are held only to a rules-based suitability standard.
"This will be the single biggest change in financial services for the retail investor in 70 years. If it gets passed as a substantive requirement, it will dramatically change the culture of the whole financial services world for the better," says Harold Evensky, principal, Evensky & Katz, and who serves on the steering group of the Committee for the Fiduciary Standard, an organization that advocates for an authentic, undiluted standard for brokers.
Last week, the SEI Advisor Network and the committee released the results of a survey of 890 RIAs and brokers to determine the level of support for and understanding of the fiduciary standard.
"What screams out is that in agreeing that they should be held to a fiduciary standard, a majority of brokers said they want greater regulatory oversight. This is in contrast to the longstanding resistance of the industry [firms]," says Knut A. Rostad, the committee's chair and regulatory-compliance officer of the RIA, Rembert Pendleton, Jackson.
In the poll, more than half the brokers and 86 percent of advisors said they believe that all financial professionals who give investment and financial advice should be required to meet the fiduciary standard. Further, the survey found that a majority of brokers (61 percent) and a significant majority of RIAs (89 percent) were against being permitted to ask clients to waive the fiduciary standard.
The battle over the fiduciary issue pits several large firms, some independent broker-dealers and various trade associations and lobbyists. Groups such as the Securities Industry & Financial Markets Association (SIFMA) and the Financial Services Institute (FSI) either oppose the fiduciary standard or advocate for a new standard.
Those supporting the full standard include the Financial Planning Coalition; fi360, whose goal is to promote a culture of fiduciary responsibility; the Committee for the Fiduciary Standard; and the Consumer Federation of America.
The committee and others worry that a new, or so-called "harmonious" standard, would be a lower standard.
Those who oppose a move to mandate that brokers be held to an undiluted fiduciary standard maintain that doing so would mean fewer product choices for investors.
"That's a bunch of b.s." says Sheryl Garrett, founder of the Garrett Planning Network and a member of The Committee's steering group. "But, yes, it's true that we'd eliminate the real [crappy], expensive things and only offer the better ones. The average citizen gets very little objective advice. This legislation would increase that, because advisors would be required by law to do what's in the client's best interest."
