Dissecting the FSI's Position on Fiduciary

The FSI's Dale Brown Speaks

Can you explain a bit more why FSI believes the SEC needs to craft a new fiduciary standard for brokers and advisors?

Independent broker-dealers and advisors are going to adapt to whatever changes are imposed on them in the regulatory environment. Our concern is that it's small investors who won't get the benefit of a new higher standard if it raises the cost and pushes advice out of their reach.

Explain why there would be a higher cost for investors.

If there's a higher legal standard, and we're not debating whether or not there should be, we're saying it's got to be a standard that works for all business models and all client situations–a standard that does not have the unintended consequence of making advice less available and less accessible.

There will be increased liability because the advisor is held to a higher standard; they are going to have to prove at some point to somebody that they are meeting that standard. If clients aren't satisfied and decide to file a complaint and pursue action, [advisors] may have to prove after the fact in some kind of arbitration forum or court–that's increased liability in their business, and every smart business person is going to find ways to mitigate that liability.

Documentation is going to be more intense, so that raises the costs of doing business; their business liability insurance coverage will potentially cost more. A fiduciary standard, whether it's one under the Investment Adviser's Act … or whether it's a new universal standard that we're describing … inherent in that is the expectation that the client is going to receive more disclosure. We think the disclosure ought to be focused on effectiveness as opposed to volume, but changes in the disclosure requirements are going to mean it's going to cost the advisor money in order to meet those disclosure obligations–whether it's providing the disclosure on paper or electronically, they've got to incur costs to develop that.

Have you gotten any feedback from the SEC on its willingness to create this new standard?

Not yet. We will continue to talk to them.

Do you have a sense of what this new fiduciary language should look like?

We've suggested it ought to be based on certain broad principles, but we haven't yet engaged the SEC beyond this comment letter. We know from the SEC's public comments, particularly Chairman Schapiro's, that she has said there ought to be a fiduciary standard [for brokers] and they intend to move forward; that's fairly clear.