fi360 Blog

The Committee for the Fiduciary Standard

Blaine and Kristina are in Washington today, meeting with SEC Commissioners Aguilar and Walter, advocating for the authentic fiduciary standard to be part of financial regulatory reform.  These meetings are the latest in our efforts in support of Aguilar's proposal for enforcement of the existing fiduciary standard for all investment advice and our activities as part of The Committee for the Fiduciary Standard. 

With regulatory reform in the works, and the fiduciary issue on the agenda, the Committee was formed to help bring public and media attention to the importance of codifying the fiduciary standard that has already been established under law (ERISA, UPIA, UPMIFA, MPERS, etc.) and regulation. The purpose is not to be anti-broker/dealer or other sales role, but to ensure investment advice comes free of conflicts and in the sole interests of the investor. 

With this goal in mind, the Committee laid out the following five fiduciary principles that are likely to be recognized by both financial professionals and the public as inherently necessary codes of conduct for trustworthy advisors:

1. Put the client's best interest first
2. Act with prudence; that is, with the skill, care, diligence and good judgment of a professional
3. Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts
4. Avoid conflicts of interest
5. Fully disclose and fairly manage, in the client's favor, unavoidable conflicts

Membership to the Committee is open to all who want to add their voice to the call for the authentic fiduciary standard for investment advice. To learn more or to join the Committee, visit the group page on LinkedIn.  As a member, you will be able to interact with others who support the highest standard for investment advice and learn more about what you can do to influence this important debate.

SEC Investor Advisory Committee Expresses Interest in Fiduciary Standard

The newly-created SEC Investor Advisory Committee gathered today in an open meeting at SEC Headquarters.  The goal of the committee will be to provide a greater voice to investors, and the committee will have the ability to make recommendations to the SEC on policy issues.  Today's meeting represents the committee's formal introduction to the public and also provided the committee the opportunity to discuss its agenda and organization.   

While discussing proposed future agenda items this morning, committee members showed great interest in further examining fiduciary duties.  Stephen Davis, Senior Fellow and Project Director for the Yale University School for Management's Millstein Center for Corporate Governance, specifically called for a full review of fiduciary duties and suggested that a subcommittee be formed to fully analyze the current status of the fiduciary duties in U.S. law and to compare it to international standards.  Mark Anson of Nuveen Investments noted the importance of defining what is a fiduciary standard, while Mac Hisey of AARP Financial Incorporated and AARP Funds highlighted the need to understand what investors think the standard is as well.  Barbara Roper of the Consumer Federation of America voiced concern that the fiduciary standard may be part of a broader issue related to investors' confusion about the difference between investment advisors, broker-dealers, and other investment and financial professionals and suggested that the committee take a step back and ensure that all underlying issues, including fiduciary duties, be considered when addressing investor confusion.  Mercer Bullard of Fund Democracy America noted the importance of providing predictability of what is required under a fiduciary standard in certain areas, such as how to disclose conflicted fees, while still providing some regulatory flexibility to address unpredictable areas on a fact-by-fact basis. 

Given these comments, it is clear that fiduciary duties will be a focal point at one or more future committee meetings.   This afternoon, the committee will continue to discuss future agenda items and is also expected to address possible refinements to the disclosure regime, including disclosure to investors in 401(k) plans.  For more information on the SEC Investor Advisory Committee, including today's meeting agenda and a briefing paper on disclosure issues can be found here.

Choices, not direction, best way to address 401k deficiencies?

Earlier this month, I looked at whether participant-direction of retirement plans is really in the best interests of the participants. While much of the feedback we have received has been supportive, even enthusiastic of the idea, some felt that participant-direction wasn't going anywhere so a better solution was best sought elsewhere.  Scott Pritchard, AIFA® of Capital Directions, LLC in Atlanta, GA had this to say:

Investment committees and trustees are simply made up of participants who have agreed to serve on the committee or as a trustee.  Rarely do those individuals have any more expertise or experience than the typical participant. 

And worse yet, those committees and trustees are typically “advised” by a provider who makes recommendations from among the investment offerings that pay the provider (certainly the term “adviser” is not appropriate) a share of the revenue generated by those offerings being in the plan.  No one in that typical plan relationship is serving the fiduciary standard of acting “solely in the best interests of plan participants”.

So, giving those committees or trustees the responsibility for managing participant assets will do no better than the current model.

Self-direction is here to stay.  And the solution to the current problem is in improving the nature of the choices that are offered to participants.  Advisor-managed portfolios constructed with low-cost, institutional tools according to Modern Portfolio Theory will give participants the ability to determine their own tolerance for risk and their own appropriate time horizon.  That is a decision that should be left to the individual.  Managing a pool of assets for the benefit of a large group, even when done by an objective investment professional,  will invariably lead to unsuitable investments for the majority.

Scott is right that most investment committee members and trustees are not investment professionals and should not be doing the job of investment management on their own. The vast majority need to use investment advisors and managers and those key professionals should absolutely be true fiduciaries.It also is true that participant direction is going to be with us for a long time. However, I do believe that centralized professional management of a large portfolio has some distinct advantages over decentralized non-professional management by individuals.

Either way, as participant-direction has continued to fail to achieve results that best prepare individuals for retirement, it is obvious that changes need to be made, and disclosure and education don't seem to be doing the trick.  What do you think? Is trustee direction the way to go? Or is Scott correct that a change in how offerings are constructed have the better long-term potential?  Let us know how you would fix the 401k in the comments below. 

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Editor's note: Scott is the author of the article The Tyranny of Choice, which further explains his contention that better choices is the better solution to addressing the problem of participant-direction in 401k plans. The article was also a finalist in our first annual article competition.

Schapiro Continues to Support a Fiduciary Standard

In her testimony before the House Financial Services Committee today, SEC Chairman Schapiro continues to support the adoption of a fiduciary standard, stating: 

I therefore believe that all financial service providers that provide personalized investment advice about securities should owe a fiduciary duty to their customers or clients and be subject to equivalent regulation. As such, I support the standard contained in the Department of the Treasury bill recently put forth entitled the "Investor Protection Act of 2009." That bill explicitly would enable the Commission to promulgate rules to provide all broker-dealers and investment advisers providing investment advice to retail customers act solely in the interest of their customers or clients without regard to the financial or other interests of the financial service professional. The establishment of this investor-focused approach as a consistent standard for all broker-dealers and investment advisers providing investment advice would represent a significant step forward in the protection of retail investors.

The key to the Chairman's recent statements is the reference to "personalized investment advice."  An issue many industry leaders and regulators alike are currently struggling to address is where to draw the line between the fiduciary standard that applies to personalized advice and the suitability standard that applies to securities recommendations and general advice, so that professionals and investors can be clear on the services being provided and the duties that attach to those services.  If the Investor Protection Act of 2009 is enacted, it would be up to the SEC to define and enforce that distinction.

Vote on regulator for consumer products delayed

Chairman of the House Financial Services Committee Barney Frank has delayed a vote that would create the Consumer Financial Protection Agency until September. Frank’s announcement seems to signal that tension on Capitol Hill is mounting with regard to adopting some of the Obama proposals.  It’s being reported that the Administration will start making a new effort to gather support and remind legislators why reform is needed.  It’s not clear yet what this all means for Investor Protection Act that would give the SEC the authority to adopt a fiduciary standard, but as most of the opposition is currently directed at creating new entities and shifting power among agencies, the fiduciary legislation could still have a good chance of moving forward.

Read more:

Doubts Slow Financial Regulation Overhaul on Capitol Hill [WSJ]

Frank delays legislation on consumer protection [The Hill]

Rep Frank: U.S. financial consumer agency needs work [Reuters]

Legislators and SEC Keep Up the Pace on Regulatory Reform

Legislators on Capitol Hill will continue to keep up the pace with hearings and mark-ups on regulatory reform in an effort to get as much done as possible before the August recess.  Hearing schedules, prepared testimony, and live webcasts can all be accessed via the links provided below for each committee.

This week, the House Financial Services Committee will hold hearings on monetary policy and systemic risk today and will hear regulators' perspectives on the Obama plan, including those of SEC Chairman Mary Schapiro, on Wednesday and Friday.  The Senate Banking Committee also will consider monetary policy on Wednesday and systemic risk regulation on Thursday.  

The House Financial Services Committee also tentatively plans to mark-up pending legislation this week and next week.  Draft legislation likely to be included in these mark-ups sessions include the Consumer Financial Protection Agency Act of 2009 (H.R. 3126), the Investor Protection Act of 2009, the Corporate and Financial Institution Compensation Fairness Act of 2009, and the Private Fund Investment Advisers Registration Act of 2009.

Separately keeping up its own pace to bring about reform, the SEC will meet Wednesday afternoon to consider whether to propose a rule that would reign in "pay to play" practices by investment advisers.  The proposal will seek to address pension fund scandals that drew headlines earlier this year.

SIFMA Supports "A New Federal Fiduciary Standard"

SIFMA Executive Vice President, Randolph Snook, is poised to testify today in a House Financial Services Committee hearing that SIFMA supports "a new federal fiduciary standard of care that supersedes and improves upon the existing fiduciary standards” and is applied “to both investment advisers and broker-dealers when they provide personalized investment advice about securities to individual investors."  Snook's testimony further states that a fiduciary standard should require broker-dealers and investment advisers to put investors' interests first and avoid conflicts of interest. 

However, in articulating SIFMA's position, Snook further states that the new federal standard should provide "investor choice to define or modify relationships with their financial services provider based on the investor's preference" and "must be sufficiently flexible to be adapted to the products, services and advice chosen by the investor." These additional statements seem to describe something other than the fiduciary standard currently set in law that defines firm obligations an investment adviser must fulfill, and could bring into question whether SIFMA is simply using the word "fiduciary" while continuing to lobby for what is really a "universal standard of care" that adapts to the existing business models of broker-dealers.  Decide for yourself and read SIFMA's position on a federal fiduciary standard starting at page 21 of Snook's prepared testimony.  For more on SIFMA's decision to back a fiduciary standard, check out this Wall Street Journal article.

To see how other industry representatives plan to support a fiduciary standard in their remarks before Congress, see page 16 of the ICI President Paul Schott Stevens' testimony and page 2 of the testimony of Diahann Lassus, a representative of the Financial Planning Coalition.

Consumer Groups Call For Stronger Fiduciary Legislation

Today, while providing community and consumer advocates’ perspectives on the Obama Administration’s Financial Regulatory Reform Proposal in a hearing before the House Financial Services Committee, representatives from the Consumer Federation of America (CFA) and the U.S. Public Interest Research Group (U.S. PIRG) called on Congress to strengthen proposed legislation that would give the SEC authority to adopt a fiduciary standard for all investment professionals that provide advice.   

CFA Legislative Director, Travis Plunkett, specifically warned Congress of the danger of allowing the SEC to adopt a “fiduciary duty lite” standard and recommended the following changes be made to legislation drafted by Treasury :

[T]he words fiduciary duty of care and loyalty that are referenced in the President’s plan should be included in the legislative language itself, so that the fiduciary duty exists in law and not simply through the adoption of SEC rules. … In addition, the SEC should be required, not simply authorized, to adopt the appropriate standards. Finally, Congress should clarify, preferably through the legislation itself but if not through accompanying report language, that: 1) the intent is to ensure no weakening of the fiduciary duty that currently applies to advisers and 2) that a fiduciary duty, once entered into, cannot easily be abandoned; brokers who are covered by a fiduciary duty when giving advice cannot escape that requirement when selling the products to implement that advice.

U.S. PIRG Consumer Program Director, Edmund Mierzwinski, agreed with the CFA’s position that legislation should not include “‘watered down’ language that provides less than the most robust protection for investors” and called on Congress to “mandate that the SEC adopt the highest standard of care in order to avoid overly broad standards and that broker-dealers not be able to escape that higher standard of protection.”

Plunkett’s full testimony on behalf of the CFA can be found at: http://www.house.gov/apps/list/hearing/financialsvcs_dem/travis_plunkett_fsc_testimony_july_16,_2009.pdf, with his remarks on the fiduciary duty specifically beginning at the bottom of page 22 of the prepared testimony.  Mierzwinski’s testimony for the U.S. PIRG is available at: http://www.house.gov/apps/list/hearing/financialsvcs_dem/mierzwinski_7.16.09.pdf, and his remarks on fiduciary responsibilities start on page 17.

Schapiro's testimony today on fiduciary duty

SEC Chairman Schapiro is currently testifying before the House Committee on Financial Services Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises.  Here is what she said on fiduciary duty in relation to the Treasury’s proposed legislative language:

We are also closely examining the broker-dealer and investment adviser regulatory regimes and assessing how they can best be harmonized and improved for the benefit of investors. Many investors do not recognize the differences in standards of conduct or the regulatory protections applicable to broker-dealers and investment advisers. It is essential that when investors receive similar services from similar financial service providers, the service providers should be subject to the same standard of conduct and regulatory requirements, regardless of the label attached to the providers. I therefore believe that all financial service providers that provide personalized investment advice about securities should owe a fiduciary duty to their customers or clients and be subject to equivalent regulation. I support the standard contained in the bill Treasury recently put forth, which would require broker-dealers and investment advisers to act solely in the interests of their customers or clients when providing investment advice.

Also of note is that she highlighted the limited resources the SEC has to oversee existing registered IAs, and that requiring hedge fund advisers to register would require an increase in SEC resources. In my opinion, this could play into the debate on whether advisers should be subject to SRO oversight.  Her full testimony is available at: http://www.sec.gov/news/testimony/2009/ts071409mls.htm.

Hearings on regulatory reform continue throughout the week, view the House schedule here: http://financialservices.house.gov/schedule.html and the Senate schedule here: http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Home.

Is participant-direction really in participants' best interests?

In his July Fiduciary Corner column in InvestmentNews, Blaine looks at the evolution of 401(k) plans and how no amount of tinkering with the formula has reliably equipped participants to make good investment choices.  Dalbar's annual Quantitative Analysis of Investment Behavior study famously demonstrates that almost without fail, investors fail to keep up with market growth.  Legal and regulatory changes to allow for improved investment choices and education have not resulted in improved results. In addition, the cost of participant direction and the lack of incentive for plan sponsor's to control costs has caused plan fees to become the target of lawsuits.

Rather than continue to try to make work what has continued to prove to be an exercise in futility, Blaine suggests that it may be time to reconsider the notion of participant-direction altogether.  Centrally administered portfolios, as you'll find in foundations, endowments and defined benefit plans, tend to be less complicated and more successful.  It places a dedicated fiduciary in a position of accountability from design to execution who is in a better position to draw on the support of professional advisors and managers to be more responsive to the changing circumstances that will be faced on the road to retirement. Perhaps it would be in participants' best interests to move to committee or trustee-directed portfolios and try to mimic that success?

Make sure you read Blaine's full article at InvestmentNews.com and click the "Recommend" button at the top of the page if you like it.  We've already received some feedback via email from those who disagree with and support this idea, and we'd like to hear more and respond to it in hope of advancing the conversation on how to provide an environment more conducive to success for retirement.  Please leave those thoughts in the comments section below.