Stricter Advisor Regulations Coming

A gap in regulatory compliance and advisor codes of conduct is leaving too many investors receiving questionable product recommendations under the guise of fiduciary advice, experts say.

“Clearly, the 21st-century fiduciary client structure paradigm has emerged,” Knut Rostad, president of the Institute for the Fiduciary Standard, said at a media briefing last month in Manhattan.

The organization unveiled a program under which financial advisors can publicly affirm to both investors and regulators that they are following newly rigorous, common-sense standards of practice that are driven by the Institute’s Code of Conduct for fiduciary-focused advisors.

“This is no doubt a bright picture, however, it’s a bright picture with a cloud over it,” Rodstad said. “That cloud is in the form of investors’ mistrust.”

He was joined by Jane Bryant Quinn, long one of the most respected media voices in personal finance.

“So many [advisement] clients don’t understand what they’re being sold,” said Quinn, a personal finance advocate for AARP. “They’re confused and of course they have no idea what they’re really paying.”

Underlying clients’ concerns are a lack of a reference for advisement fees and murky standards around disclosure, she explained.

“There is no benchmark for clients to know whether the fees that financial advisors are disclosing are reasonable and in their best interests,” Quinn told the gathering journalists.

Rodstad offered the Fiduciary Institute’s Campaign for Investors as a resource.

“It’s difficult to know in isolation without having some basis for comparison from the investor’s point of view,” Rostad said. “On our website, we do provide a way for investors to see what their underlying expenses and costs are, and also to make an initial judgment as to whether their advisor fees are medium or low or maybe a little bit on the high side. So, we are trying to help move the industry in that direction.”

In the future, disclosure templates may very well be implemented by law, according to former SEC commissioner Luis Aguilar.

“Disclosure and transparency are good things that ought to be required, ought to be improved and ought to be made as clear and fulsome as possible but there’s still a basic conundrum, which is what the standard that the person selling the services needs to meet,” Aguilar said.

Currently, there are no mandated templates of disclosure, but the issue has crystalized around the differences between the fiduciary standard applicable to investment advisors, the suitability standard applicable to broker/dealers and providing personalized investment advice to clients.

“This is something that the SEC has studied, analyzed and has been considering at great lengths for many years but very little concrete action has been executed to date,” Aguilar said. “My hope is that the SEC will act to level the playing field between investment advisors and broker/dealers so that they provide the same services and impose a high fiduciary standard that puts clients first.”

Mary Jo White, chairwoman of the SEC, recently confirmed that agency staff are discussing the parameters of its fiduciary rule, but publication remains a long ways off.

Meanwhile, the Department of Labor published its fiduciary rule in April. It is mired in court amid several lawsuits by industry groups who say they don’t oppose a “best interest” standard, but want a better rule.

The DOL rule is slated to begin taking effect April 10, 2017, with full implementation in January 2018.

Juliette Fairley is a business and finance journalist who has written four personal finance books for John Wiley & Sons and has written for major news organizations, such as The New York Times and The Wall Street Journal. She is a member of the American Society of Journalists and the New York Financial Writers Association and a graduate of Columbia University's Graduate School of Journalism. Juliette can be reached at [email protected].

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