As the industry keeps changing, it's important to know a company's "pedigree."
By Cyril Tuohy
A coalition of financial and consumer groups reiterated calls for the Securities and Exchange Commission (SEC) to apply a uniform fiduciary standard to financial professionals who provide personalized investment advice.
The SEC is considering a uniform standard under Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Registered financial advisors are required to deliver a fiduciary standard of care toward their clients, but broker/dealers are required to deliver a “suitability” standard of care, which some in the financial industry call a lower standard.
Such a “bifurcated approach” to regulating investment advice “reflects the failure of regulatory policy to keep pace with changes in market practices,” the coalition wrote in a 15-page letter to the SEC.
“There is no justification for applying different standards of care to financial professionals who are offering the same services to investors,” the coalition wrote.
The coalition is made up of the CFP Board, the Financial Planning Association, the National Association of Professional Financial Advisors, the Consumer Federation of America, AARP and Fund Democracy, a nonprofit mutual fund shareholder advocacy group.
The SEC has collected testimony from various interest groups over the past 18 months in support of and against applying a uniform fiduciary standard.
Financial advisor groups like the National Association of Financial and Insurance Advisors (NAIFA), which represent both fee-only and commission-based advisors, say that requiring a fiduciary standard would make it more expensive for thousands of advisors, and cause them to drop some of their Main Street clients.
Clients unlucky enough to be dropped from an advisor’s roster would be left with no advice at all, and would therefore be worse off than if they had advice deemed merely suitable, NAIFA argues.
Retail investors often don’t know the difference between a suitability standard and a fiduciary standard, or even that such a distinction exists. Critics of the suitability standard claim it doesn’t do enough to require a commission-based broker/dealer to disclose conflicts of interest when recommending investments from which a broker/dealer stands to gain.
Section 913 of the Dodd-Frank Act gives the SEC the authority to impose a uniform standard of care for financial professionals engaged in providing advice to retail investors.
A higher standard of care was deemed necessary in the wake of the financial crisis during which millions of investors were gored by the excesses of Wall Street, and which the Dodd-Frank Act was designed to prevent from reoccurring.
In public comments earlier this year, White said that because investment advisors and broker/dealers offer “substantially similar services,” a review of the regulatory distinctions between them is warranted.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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