SEC's Broker-RIA Fiduciary Call for Comments

In The White House Blog on May 5, called "The Good Guys," White House Communications Director Dan Pfeiffer put it like this: in a list of financial reforms the White House was watching, he highlighted "a few simple, straightforward improvements that would further strengthen an already strong bill and really help American families. We'll call them the "Good Guys". Let's hope they prevail over the 'Lobbyist Loopholes' as the debate moves forward." In his list of 10 reforms, the fiduciary standard for investment advice was the number-one issue.

"Investment Advice by Any Other Name. Today, investment advisors have a fiduciary duty to their clients – that is, they are legally obligated to act in their client's best interest. But brokers offering investment advice have no such obligation. Why does that make sense? Well… it doesn't. If you're a retiree managing your savings, or a family saving for college, you should be able to trust that the person giving you investment advice has your best interests at heart -whether that person is called a broker or an investment advisor. It's that simple," Pfeiffer said in the blog.

Formerly: A Clear Line Between Sales and Advice
At issue: the 'suitability' standard versus the 'fiduciary' standard of conduct toward investors. Investment advisors must adhere to the fiduciary standard: in addition to always control and disclose all costs to the investor, the Committee for the Fiduciary Standard (of which I'm a member) has developed Five Core Fiduciary Principles:

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

Clarity in Titles and Roles

When brokers simply bought and sold securities for customers and titles were such that everyone could tell they were dealing with a salesperson–advice wasn't part of the equation. Since advice is now a big part of the sales process for many brokers, most of whom call themselves advisors, the actions of brokers and investment advisors look the same for many investors. This is a big deal. In practice, the advisory function looks like a duck. It walks like a duck. But one is a duck and one is not. When titles contain the words advisor, counselor, or consultant, they convey a duty of loyalty, not a sales function.

These words are very important and no matter what the outcome of the SEC's study and rulemaking, titles need to be clarified and defined. Anyone who uses a title that conveys prudence, competence, authority and loyalty should be required to act under the highest standard of loyalty–and that is fiduciary duty.