By Cyril Tuohy
Advocates for the fiduciary standard have renewed calls for raising fiduciary requirements on financial and investment advisors as federal regulators prepare new sets of rules governing the duties and responsibilities of advisors toward investors.
In a series of meetings and conference calls organized over the past two weeks by the Institute for the Fiduciary Standard, some of the most respected names in the financial services industry called for the highest duty of care to be imposed on advisors.
Knut A. Rostad, the institute's president, said his recent industry research had revealed the “increasingly dim and hard-to-detect line between sales and advice,” in the minds of investors.
The blurring of the sales-advice line isn’t new, as a similar situation led to the passage of the Investment Advisers Act of 1940, which governs registered investment advisors, Rostad said.
The institute organized the calls and meetings as part of its “Fiduciary September” event, which the advocacy group launched in 2011 to raise awareness of the importance of fiduciary principles.
Panelists this year included John C. Bogle, founder of Vanguard Group and president of the Bogle Financial Markets Research Center.
Bogle, an ardent critic of advisory-industry fees, conflicts of interest and trading practices, said that the fiduciary standard is the “best route to investment success.”
Meeting a fiduciary standard of care, which falls on investment advisors registered with the Securities and Exchange Commission (SEC) or with state regulators, is the highest legal standard advisors can offer their clients.
Registered investment advisors, regulated by the Advisers Act, are professionally required to act in the best interest of their clients based on trust and loyalty.
Ethically and legally bound to meet a fiduciary standard, registered advisors often charge higher fees than a broker/dealer registered representative, who also is qualified to dispense advice.
Registered reps acting as financial advisors and offering retail investment advice are required to meet a minimum standard of care known as a “suitability” standard.
Advisors bound by the suitability standard say they offer advice that is good enough, and offer advice at lower cost than registered advisors. As a result, millions of investors are better off with suitable advice than with no advice at all.
Rostad and backers of the fiduciary duty of care say the standards are necessary as investors often have little appreciation for the distinction between a fiduciary standard and a suitability standard.
Blurring the line between sales and advice, the uncertainty about what financial advisors and securities brokers do and how they are paid has left many investors confused and has eroded confidence in the industry, according to backers of fiduciary standards.
SEC Chairwoman Mary Jo White has said investors generally don’t understand the difference between stockbrokers and registered investment advisors, nor are clients clear about the different compensation models that govern the remuneration of a broker and a registered investment advisor.
Investor distrust of financial services, financial institutions and “evidence that some of this distrust is seeping into their views of financial and investment advisors,” is harmful, Rostad said.
Rostad, author of a fiduciary best practices white paper for advisors published earlier this month, said avoiding or neutralizing conflicts of interest; disclosing business practices and fees; and clarifying fees, commissions and expenses are vital to maintaining advisor credibility in the eyes of investors.
“We strive to make sure clients know the risks they take, the services we deliver and the fees they pay,” Rostad wrote in the paper. “It is what fiduciary advisors do and what so emphatically distinguishes advice from sales.”
Some of the confusion involving the regulation of registered investment advisors and registered broker/dealer reps almost seems tailor-made to generate conflicts of interests, leaving investors scratching their heads.
“In today's financial services industry it is common to see situations where a financial advisor is dually registered as both a stockbroker and an investment advisory representative of an RIA firm,” said James W. Watkins III, founder and chief executive officer of the investment education company InvestSense in Snellville, Ga.
Watkins said many advisors “dismiss the whole issue of fiduciary duty, claiming that they are not fiduciary,” even as courts have begun to bestow fiduciary status on advisors more frequently than before.
Regulators are reviewing whether registered investment advisors and broker/dealers should adhere to a uniform standard.
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 [email protected].
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