News, Vision & Voice for the Advisory Community


Improbable win for fiduciary standard: Congress set to hand SEC power to impose fiduciary duty on broker-dealers

Conference committee agrees on a measure that calls for six-month study and then gives SEC authority to write single set of rules for advisors and brokers

Friday, June 25, 2010 – 3:36 AM by Elizabeth MacBride
no description available
A strong advocate for the fiduciary standard, Frank pulled out a win in the conference committee this afternoon.

Against long odds and well-financed opposition, advocates for the fiduciary standard won an important victory yesterday when the House and Senate conference committee working on financial services reform decided to give the SEC authority to extend the fiduciary duty to broker-dealers.

A compromise reached in the early afternoon Thursday calls for a six-month study of the issue, and then says the SEC may issue rules under the Investment Advisor Act of 1940 that would apply to both broker-dealers and investment advisors when giving investment advice to retail clients. The rules would require that broker-dealers act in the best interests of their clients and that they disclose all conflicts of interest.

“We are celebrating. We are feeling much relieved,” said Neil Simon, government relations vice president for the Investment Adviser Association. “This would end the current situation where advice can be delivered under two very different standards.”

Though much depends on how — and how quickly — the SEC acts, the measure has far-reaching implications. Currently, investment advisors are fiduciaries and must act in the best interests of their clients; brokers act under a lower suitability standard that calls simply for their advice to be suitable for a client. See: The suitability standard, defined The new legislation could change that. For example, if brokers were acting under a fiduciary duty, they could not recommend a mutual fund that charged higher fees to a client if the broker knew of a comparable ETF with lower fees. See: How 10 top groups define 'fiduciary

Some people have argued that if brokers become fiduciaries, investment advisors lose one of the ways they differentiate themselves to clients. But advisor advocacy groups, including the IAA and the National Association of Personal Financial Planners, chose to align themselves on the side of advocates for consumers. Some people saw the afternoon’s events as a historic moment in the history of investor protection.

Small price to pay

“I’ve seen others complain about the six-month study included in the amendment,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “I disagree. Six months is a small price to pay for a reform we’ve been waiting for for decades.”

“We are delighted,” said Robert Glovsky, chair of the CFP Board of Standards.

Washington seems to be in a mindset of reform that extends beyond what Congress is empowering the SEC to do. In March, the Department of Labor took a similarly pro-fiduciary stance: See: Why the DOL’s proposed 401(k) rules could ding brokers and leave the spoils to RIAs

The measure agreed upon in the conference committee is part of the financial reform legislation, which still must be approved by the House and Senate and signed into law by President Barack Obama.

There are some important carve-outs in the legislation that protect broker-dealers from too large a hit. The language in the measure is very similar to what passed in the House of Representatives late last year.

Reprieve for discount brokers

The fiduciary standard envisioned under the legislation would only apply to broker-dealers when they are giving advice to retail clients, not institutional ones. It also does not call for an ongoing standard of care for broker-dealers. That means that the fiduciary standard of care exists while the broker is giving advice, but not afterward. That carve-out was especially important to discount brokers, who may only see some clients one time for a single transaction. The legislation also says that on its own, receiving a commission is not considered a violation of fiduciary duty.

The most vocal opponents of extending the fiduciary duty were insurance brokers. The National Association of Insurance and Financial Advisors issued a measured response, praising the legislation for including the study provision, but adding:

“We are disappointed with the decision to allow the SEC to put in place a ‘best interest’ standard that will not tie directly to findings from the study. However, we support the House efforts to ensure that the ‘best interest’ standard recognizes that no broker-dealer and their registered representatives can violate the standard simply because they receive commissions and sell proprietary products.”

One reason that fiduciary advocates were celebrating nearly whole-heartedly, despite the carve-outs, is that just yesterday, the conference committee appeared poised to accept a proposal by Sen. Tim Johnson, a Democrat of South Dakota, that called for a longer study, did not contain strong language linking the new legislation back to the standard in the Investment Advisors Act of 1940, and appeared to lay the groundwork for FINRA to regulate advisors.

The measure that was agreed upon yesterday wasn’t ideal, said Simon, but “politics is the art of the possible.”

The SEC could still balk

Some fiduciary advocates raised doubts about whether the SEC actually will issue rules. The amendment to the legislation gives the SEC the authority to work on rules while the study is ongoing, and issue them after the study, but it does not require the commission to do so. Kristina Fausti, director of legal and regulatory affairs for Pittsburgh-based fi360, noted that the SEC is going to be charged with carrying out many of the new regulations in the nearly 2,000 page legislation.

“Its plate is full,” she said. “Fiduciary advocates will have a lot to keep their focus on.”

Ron Rhoades, RIABiz.com’s One-Man Think Tank columnist, said, “There’s an old saying about the SEC’s headquarters DC – “SIFMA owns the building”

However, there is reason to be hopeful, said Glovsky, that the SEC will take up the rule-making in a timely fashion. Many of the commissioners, including Mary Schapiro, are on record calling for a fiduciary duty for brokers.

“After disappointments over several years, this is a clear cut victory for investors,” said Knut Rostad, chairman of the Committee for the Fiduciary Standard.

For a fuller story of the multi-year struggle to achieve this victory, see: The story behind this year’s surprise advancement of the fiduciary standard

Editor’s Note: Is this a victory or a loss for RIAs in your opinion? Please offer any thoughts below in the comments section!

Sara Hansard

Sara Hansard

June 27, 2010 — 1:19 AM

Sounds like the fiduciary side probably won out in the financial services bill, although it will depend on what the SEC comes up with. As of now, at least, I would assume the SEC would come down on the fiduciary side.

But the study is not necessarily a bad thing, notwithstanding the fact that the wording for the study is written in terms of the language that brokers have been using, and it is clearly an attempt to try to push the SEC to go against imposing a fiduciary standard on brokers.

Nevertheless, the SEC does need to look at how well investors actually do paying broker commissions versus paying fees to advisers. The problem that I think advisers are going to have is that they’re expensive. Regardless of their argument that really, in the end, investors actually pay more by going to brokers and buying worse investments, investors are simply not going to believe that when they’re quoted extremely high prices for advisory services. Moreover, advisers have been arguing for years that investors should pay more attention to mutual fund fees since paying even an extra 1% on assets adds up over time. In my 12 years of covering the advisory industry for InvestmentNews I noticed that many advisers charge 1% of assets. Further, most middle class people are not going to be able or willing to pay big hourly fees for advisers. Advisers have not been willing to deal with this issue, and I think it will eventually come back to haunt them.

Perhaps one possibility is offering investors the best deal, whether it’s by paying on commission or by paying fees based on assets.

Jack Bullet

Jack Bullet

January 18, 2013 — 6:28 PM

Barney Frank should be wearing an orange jumpsuit and doing hard time for his role in the housing crisis which has nearly ruined the economy and the lives of countless Americans. It is astonishing how these radical leftists not only get away with criminal behavior, but how they continue to be given any shred of credibility by anyone.

Stephen Winks

Stephen Winks

June 28, 2010 — 4:58 AM


The double dipping and tripple (commission, advisory fee, 12(b)1, embedded product cost) dipping in compensation will be done away with by required transparency so total cost becomes an issue which will be managed by how the industry approaches portfolio construction. Call me crazy, but I believe mutual funds will be a big loser under a fiduciary standard of care because of their cost structure and inability to report holdings in real time. The industry needs to move from a product management organizational structure to a process management organizational structure. Transparency will require advisors to have good answers on why mutual; funds were used relative to better opportunities. I believe real time buy/sell manager research managed by overlay management technology which facilitates real time management and documentation of an incredible degree of portfolio detail for an unlimited number of custom client portfolios, is the future. It is client centric, not product centric, it generate necessary documentation, it supports continuous comprehensive counsel required for fiduciary standing, it is cheaper at 25bps than mutual funds at 120 bps, and eliminates redundant triplicate account administration cost at the product, client and trustee levels that adds no value.

A fiduciary standard establishes and requires accountability that the industry must effectively manage which requires a more structured approach to portfolio construction and advisory services not presently in place.


Stephjen Winks

Stephjen Winks

June 25, 2010 — 2:49 PM

Wonderful outcome.

The suitability standard is obsolete in advisory services. Rather than advice being incidental to trade execution in six months trade execution will be incidental to advice. If Cerulli is right that in seven years 80% of brokers will be primarily engaged in advisory services up from 20% today, this legislation reorders the entire industry around advice rather than commission sales which has been the dominant business model for centuries.

We all need to get behind Mary Shapiro, as she must fend off brokerage industry interests in the formulation of rules and regulations.

Mary Shapiro has the opportunity to make history but her hands have been tied in promulgating rules and regulations by Congress requiring the Johnson loophole absolving brokers from their ongoing fiduciary duties and responsibilities after a recommendation is made. Essentially this makes brokers not accountable for their investment recommendations. This is difficult to reconcile with the traditional understanding of fiduciary standing. If Shapiro can make this exception specifically limited to discount brokers, then it is manageable. If not, there is a generalized fiduciary lite standing for brokers which permanently place brokers at an inferior competeitve market position relative to RIAs where they are not accountable for their investment recommendations. This provides RIAs a massive competitive advantage as they are held to THE fiduciary standard of care which entails on going accountability for their investment recommendations. Importantly, comming to Shapiro’s aid, top brokers will not put up with second rate advisory services status. Either our largest firms respond to the needs of its top advisors or top advisors, whose alleigence is to their clients, will be forced to become RIAs.

Shapiro also has a challenge with proprietary products not necessarily being a conflict of interest, as it requires proprietary product manufacturers to always be the best alternative in order to be recommended at all. Of course in a competitive market place this is not possible. Thismeans that proprietary product vendors will not allow their captive sales force provide advice—limiting their role to acting in a sales capacity.

The industry as we know it is about to be reordered around advisory services in the best interest of the consumer.


RIABiz Directory

The Industry Sourcebook for RIAs

   |    LISTING

RIABiz Directory sponsored by:

Directory Sponsor Logo