As the language in the financial services reform bill, which the Senate passed, 60-39, on Thursday, July 15, gets parsed, rumors still abound about how it all will affect financial services firms, regulators and investors.
From an investor perspective, probably the most important change is that the bill, "Gives SEC the authority to impose a fiduciary duty on brokers who give investment advice–the advice must be in the best interest of their customers," according to the summary release from the House Financial Services Committee.
The SEC is tasked with a six-month study of whether brokers who provide advice to investors should have to provide that advice under a fiduciary standard of care as embodied in the Investment Advisers Act of 1940. There will also be comment period, and if it deems it to be necessary, the SEC will then write guidelines and rules for brokers who provide advice to do so under the fiduciary standard of care.
There are a few differences in points of view as the ball rolls forward here. But many of those views are not as divergent as they might at first appear.
As a member of The Committee for the Fiduciary Standard, I have been part of many meetings this past year in which thoughtful discussions took place among practitioners, regulators, legislators and advocates–thoughtful even though participants were not always on the same team–regarding the impact and practices, fact and fiction, about applying the fiduciary standard.
While the setting may change, the fiduciary standard, based on 800 years of common law, remains the same. First and foremost, it is a duty of loyalty to the client. Brokers who work with ERISA or discretionary accounts are no strangers to the fiduciary standard.
And the majority — 53% — of brokers — have said that, "all financial professionals who give investment and financial advice should be required to meet the fiduciary standard," according to a Fiduciary Survey from SEI and The Committee for the Fiduciary Standard.
However, whether most advisors are prepared in terms of firm support is another issue entirely. Only 20% of advisors said it "would be difficult to conform their practice to meet a new, industry-wide higher fiduciary standard," according to another recent survey, the Envestnet Fiduciary Standards Study, which provides systems that will help advisors document their fiduciary process–a fundamental part of practicing under the fiduciary standard.
Envestnet's study reports that most advisors making the transition to fiduciary duty will need firms' support for: such "key relationship functions as developing a full view of the client's life goals and financial situation; development and maintenance of the investment policy statement; ongoing client communications, updating the financial plan for changing circumstances, and disclosure of investment costs and fees."
First Things First
Here are a few places where rumor has run hotter than fact: While it is impossible to know what any regulator or SRO will do in creating a framework to apply fiduciary duty in a brokerage setting, there is a substantial body of discussion and precedent in the investment advisor world that could logically apply here.
What will be different for firms and brokers who want to make the transition is that the fiduciary standard is principles-based–not rules-based. That's a sea change from FINRA regulation that is much more rules-intensive.
In addition to controlling and disclosing all costs to the investor, here are the Five Core Principles of the fiduciary standard, developed by The Committee for the Fiduciary Standard:
o Put the client's best interests first
o Act with prudence; that is, with the skill, care, diligence and good judgment of a professional
o Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts
o Avoid conflicts of interest
o Fully disclose and fairly manage, in the client's favor, any unavoidable conflicts
