fi360 Blog

Slow progress, but more support for a fiduciary standard

With political momentum shifting on the heels of Scott Brown's victory in Massachusetts last week, the future of financial regulatory reform and how quickly it can get done is becoming a bigger question mark with each passing day. While many hoped the Senate Banking Committee would be ready to tackle financial reform issues by late January or early February, recent reports indicate that it likely will be spring by the time the the committee has a bill ready. Committee Chair Christopher Dodd is still working through several issues with Committee Ranking Member Richard Shelby in hopes of gaining the bipartisan support that will be needed for financial reform to pass in the Senate.  However, reports from the Hill are that no final decisions have been reached on key provisions in a proposed Senate bill.  

Despite the slow progress in the Senate and increased lobbying by the insurance industry, remarks made by Goldman Sachs CEO Lloyd Blankfein and Bank of America's Sallie Krawcheck last week make it clear that support for applying a fiduciary standard to all professionals who provide investment advice is widespread.  What remains unclear, however, is whether these industry leaders support extending the existing fiduciary standard recognized by groups such as the IAA, Financial Planning Coalition, and the Committee for the Fiduciary Standard, or whether their views fall in line with SIFMA's call for a new federal fiduciary standard.  

And even if a new fiduciary standard is what is being referred to, it's still uncertain what SIFMA and its members think such a standard should look like or why such a new standard is needed.  Throughout the fiduciary debate, SIFMA and others have argued that fiduciary law lacks clarity due to the presence of state common law and a lack of understanding of when a fiduciary duty applies.  However, such arguments ignore the fact that requirements under the securities laws, including the Investment Advisers Act of 1940, are federal standards.  In fact, an outline on the SEC website describing regulation of investment advisers by the SEC explains that the fiduciary standard applied to investment advisers at the federal level does not rely on state law and is therefore a uniform standard (you'll find the explanation of fiduciary duty on pages 13-16 and the reference to the federal standard in footnote 80).  Even the Supreme Court has stated more than once that the anti-fraud provisions of the Investment Advisers Act establish "federal fiduciary standards" to govern the conduct of investment advisers.

Bottomline, the federal fiduciary standard is established and has been applied by federal courts and the SEC for years.  And though political momentum has shifted in Washington, it is still clear that the individuals in the investing public  are concerned about the economy, their financial futures, and their ability to rely on financial professionals.  It may take more time and compromise to make financial regulatory reform a reality, but both political and public pressure is mounting to make it happen and to ensure investor protection is a key part of reform.   

A Time for Advocacy

After finishing up hearings on financial regulatory reform earlier this month, the House Financial Services Committee began the task of marking up reform legislation this past week.  The Committee reached its first major milestone by passing legislation on over-the-counter derivatives and will continue to push forward on other pieces of legislation in hopes of a full House vote on a reform package in November. 

Fiduciary duties for investment professionals that provide advice continues to be a key piece of the proposed Investor Protection Act of 2009 , which will likely be considered in a mark-up session next week or the following week.  With this legislation looming, industry groups representing different views on the fiduciary standard have been increasingly promoting their advocacy efforts on Capitol Hill.  Just these past couple of weeks the Financial Planning Coalition launched a website, as did the Committee for the Fiduciary Standard, in order to promote fiduciary issues and keep the public abreast of their advocacy activities.  On the broker-dealer side, the new head of the SIFMA Washington office started his new post and will play a key role in the organization's lobbying efforts to promote "a harmonized fiduciary standard." Meanwhile, members of FSI spent a day meeting with Congressional members to promote "a universal standard of care" for investment professionals.  

In an effort to further promote the fiduciary standard, fi360 CEO, Blaine Aikin, urged our readers earlier this week to speak out on behalf of investors and the professionalization of investment advice by contacting legislators and regulators.  Now is a key time for clear and effective advocacy for the fiduciary standard as Congress is moving quickly to consider and implement financial regulatory reform, and key industry groups are jockeying for their views to be heard.   

If you would like to do more to promote the fiduciary standard and ensure that Congress "gets it right", you should contact your Senators and Congressional Representatives as soon as possible.  In addition, you should directly reach out to the Chairman Barney Frank and Ranking Member Spencer Bachus of the House Financial Services Committee and Chairman Christopher Dodd and Ranking Member Richard Shelby of the Senate Committee on Banking.  

Key points to emphasize to Congressional Leaders and your own Senators and Representatives include: 

• To the extent that investment professionals provide similar services, similar protection for investors' interests should also be provided; and in particular, broker-dealers who provide investment advice should be held to the same fiduciary standard of care as investment advisors. 

• As acknowledged by panelists testifying before on the House Financial Services Committee on October 6, 2009, the fiduciary standard is a more stringent and higher standard than the suitability standard that currently applies to brokers.  The fiduciary standard requires investors' interests to be put first and involves more than just checking to ensure that a single investment is appropriate for an investor. 

• Despite claims by SIFMA to the contrary, the principles upon which the fiduciary standard are based are clearly established in law.  (In fact, as Blaine's blog post from Wednesday explains, the Committee for the Fiduciary Standard has identified five core principles, which have been received positively by policymakers in Washington.) 

The message on the fiduciary standard needs to be made simple and clear to legislators who must largely look to regulators and the industry for guidance and education on these issues.  We will continue to keep you updated as regulatory reform continues to develop, and we hope that you will heed the call to action to promote a positive change in regulation on behalf of investors and the profession as a whole.

A true fiduciary standard can't compromise basic principles

In my most recent Fiduciary Corner column in Investment News, I wrote about The Committee for the Fiduciary Standard and the five fiduciary principles the Committee focuses upon. The five principles capture the essence of the fiduciary standard that is well established in law and regulation. They are paraphrased here:

1. Place investors best interests first (singular duty of loyalty to the investor)
2. Provide advice with the skill, care, diligence and judgment of a professional (duty of due care or the prudent expert standard)
3. Provide full and fair disclosure of all material facts (duty of utmost good faith)
4. Avoid conflicts of interest (because conflicts are situations that make fulfillment of the duty of loyalty less reliable)
5. Manage unavoidable conflicts in the best interest of the client (which is meant to assure that the objectivity of the advisor is not impaired)

Some financial service industry trade groups and a handful of transaction-oriented firms are advocating, either overtly or by lobbying legislators behind the scenes, to establish a “new fiduciary standard” that purportedly would draw from both the principles-based fiduciary standard and the lower rules-based fair dealing standard associated with traditional brokerage activities.

While these efforts are couched in terms of finding a workable compromise solution, they amount to a call to abandon the true fiduciary standard and christen the fair dealing standard as the “new fiduciary standard.”

Simply put, you can’t compromise principles and claim to adhere to them.  Consider what it would mean to compromise on the five fiduciary principles.

1. Compromising the singular duty of loyalty results in divided loyalties, which is at odds with the very definition of a fiduciary.
2. Compromising due care results in acceptance of less than a professional level of competence.
3. Compromising on full and fair disclosures results in the suppression of material information and a failure to provide the transparency crucial to relationships of trust.
4. Accepting conflicts of interest that can reasonably be avoided undermines the integrity of the duty of loyalty.
5. Permitting unavoidable conflicts to be merely disclosed rather than managed in the best interests of clients creates a “buyer beware” overtone to client interactions that is inconsistent with the entire concept of professional advice

In short, regulatory reform that compromises fiduciary principles is not reform at all; it is regulatory regression that would weaken investor protections and push the business of investment advice further from becoming a true profession. Moreover, the fiduciary standard stripped of its core principles bears no resemblance to the true standard whatsoever. Please speak out on behalf of investors and the professionalization of investment advice by contacting legislators and regulators, commenting on financial blogs like this one, and joining The Committee for the Fiduciary Standard (www.thefiduciarystandard.org).

The Converging Worlds of Brokers and Advisors

In our webinar yesterday, The Converging Worlds of Brokers and Advisors as Fiduciaries under Regulatory Reform, we took a look at the differences between the suitability standard for brokers and the fiduciary standard for advisors, and the outlook for the "harmonization" of the two standards as the debate over a fiduciary standard as a part of regulatory reform is taking place.

As we've touched on in this blog before, due to a consensus that fiduciary duties are likely to be extended to both brokers and advisors who deliver investment advice, the debate now is on what the fiduciary standard will look like. While some would like to see the existing fiduciary standard defined in legislation (ERISA, UPIA, UPMIFA, MPERS) extended to all investment advice, others would prefer to see a standard that incorporates elements from the existing suitability standard. With these two views in mind, some of the difficult questions facing regulators in creating "harmony" include:

1. Will individuals still be allowed to be registered both as a broker and an advisor?
2. Will principal trades require up-front approval?
3. Will self-custody by advisors be prohibited or made impractical?
4. Will a universal fiduciary standard extend to advice regarding insurance products?
5. How will the sale of proprietary products be managed?
6. What will be the impact on product design in light of fee and compensation leveling requirements?
7. How will the brokerage culture adapt to the extension of fiduciary duties?

Click "Play" on the media player below to view the recording of yesterday's webinar and hear some of our thoughts on these questions and harmonization in general. You may also download the presentation slides used in the webinar. The recording of this and previous webinars are all available for download in our archive.

What do you think? Let us know in the comments below.

We'll be answering more questions submitted during the webinar on the blog over the coming weeks.  If you have a question on this subject that you'd like us to answer, send us an email at blog@fi360.com.

Early Fiduciary Counter-Arguments Miss the Mark

Last week, while taking a shot at New York prosecutors suing his company for allegedly misleading investors on the safety of auction rate securities, Charles Schwab also took the opportunity to criticize proposed regulatory reform.  Schwab argued that regulatory proposals seek to limit individual investor risk through the adoption of consumer protections and fiduciary liability for brokers to the point of virtually eliminating investor choice.  However, Schwab's claim misses the mark completely in terms of fully appreciating the debate on fiduciary issues.  

In fact, the discount brokerage model that Schwab seeks to defend is not even really at issue.  Rather than trying to eliminate traditional and discount brokerage functions, proponents of the fiduciary standard would rather see a clearer demarcation develop once again between advisory and brokerage services.  In seeking this demarcation, fiduciary advocates aim to protect those investors who receive investment advice and assume that their interests are being placed first.  To this end, regulatory reform is not about removing investor choice as Schwab argues, but rather ensuring that investor choices are clearer and that investors are aware of the risks they are assuming, whether they choose to get professional advice or venture out into the market on their own. 

As views like these from the other side of the fiduciary debate emerge, it's important not to lose sight of the ultimate goals of strengthening investor protection and restoring integrity in the financial and investment industry. It's also important not to forget what it means to be a fiduciary and its signficance to the investor.  However, there are many in the industry that would like to draw attention away from this focus. 

In a recent interview, Allan Hancock, a former President of the National Association of Insurance and Financial Advisors, argued that the fiduciary standard being driven by the financial planning community is not needed in the insurance industry and will ultimately harm consumers because it is focused more on paperwork, compliance, and turf wars in Washington.  When asked if any of his customers have asked about the fiduciary standard, Hancock stated, "Not at all. ... They don't buy based on comparison. They buy if they trust you, if you have credibility, if you have a reputation, and you care about them."  Last time I checked, what Hancock describes as his customers' main concerns are the very essence of the fiduciary standard - trust, loyalty, and due care.  So not only does Hancock's fiduciary counter-argument miss the mark, but it appears to further the discussion in favor of fiduciary values.

Hancock also tries to cloud the issue by asserting that clients and customers don't care about the word "fiduciary."  Hancock may be right that clients don't know or understand this word.  Indeed, most individuals I encounter outside of my professional circle don't even know how to pronounce or spell it.  That doesn't mean, however, that they don't care about what it means and how it affects their financial and investment decisions.  Clients who are entrusting financial professionals with their life savings, children's educations, retirement, and overall financial security have a right to expect a high level of care from those professionals.  And, as found in the oft-cited Rand Report, clients already generally assume that their financial advice is in their best interest. Adopting the fiduciary standard would guarantee that high level of care and validate clients’ assumptions.

With August coming to a close, the frenzy of activity in Washington aimed at moving financial regulatory reform forward is poised to pick back up where it left off at the end of July.  However, as the comments of Schwab and Hancock illustrate, the debate over those reforms, and especially the application of a fiduciary standard to all investment advice givers, is far from over and in many respects is just about to begin.  While it might be easy to dismiss the early remarks of Schwab and Hancock, the fiduciary movement and investors alike would be better served if we remind ourselves what is really at stake and use it to prepare for the larger debate about to unfold.  

Defining the Fiduciary Standard

Long before the current discussion on regulatory reform began, the issue of whether a fiduciary standard should apply across the board to all investment advice givers was already being debated.  But with the release of the Obama plan in June, the debate has quickly become centered on how to define the fiduciary standard.  

As we recently posted, the Committee for the Fiduciary Standard has focused it's efforts on advancing "the authentic fiduciary standard" and has identified five core fiduciary principles.  This position is meant to highlight the fact that calling for a fiduciary standard for advisers is not enough.  Rather, legislators and regulators should seek to apply the fiduciary standard, which has been established under law (ERISA, UPIA, UPMIFA, MPERS, Investment Advisers Act, etc.) and regulation.  Simply put, the "authentic" standard should not be diluted and should be faithfully applied.

This is a powerful message that was already put forth by SEC Commissioner Aguilar prior to the formation of the Committee for the Fiduciary Standard and it is quickly gaining momentum.  Just last week, the FPA, NAPFA, IAA, and CFP Board sent a joint letter urging the newly formed SEC Investor Advisory Committee to consider recommending the clear and unambiguous extension of the principles-based fiduciary duty under the Investment Advisers Act to brokers who provide investment advice, rather than seeking to identify a newer precise definition of fiduciary duty. 

At a time when change is being widely promoted by lawmakers, the discussion surrounding the fiduciary standard serves as an important reminder that there is already a strong foundation in law that could better protect investors if it was more widely applied.  More importantly, the application of the existing fiduciary standard will ensure that all investors who seek advice from investment professionals will receive the core protections they already believe they are getting.    

DoL seeking a few good nominees for the ERISA Council

Five seats open up in November for the Department of Labor's Advisory Council on Employee Welfare and Pension Benefit Plans (aka, the ERISA Advisory Council) and the DoL is soliciting nominations. The Council's function is to advise the Secretary of Labor on her functions under ERISA. The members are appointed by the Secretary to a three-year term in which they take part in at least 4 public meetings/hearings a year tackling 3-4 issues per year, eventually submitting a report on each issue with the Council's findings and recommendations.  Issues on the table for 2009 include Stable Value Funds and Retirement Security in the Current Economic Conditions , Promoting Retirement Literacy and Security by Streamlining Disclosures to Participants and Beneficiaries , and Approaches for Retirement Security in the United States.  Past issues have included disclosures, plan funding, fees, participant and advisor education, and communications. The full list of past reports can be found here.

From the official press release, here are the details for nomination procedures:

Interested persons or organizations may nominate qualified persons for membership. Recommendations must be submitted by letter, resolution or petition and signed by the person or, in the case of a nomination by an organization, by an official representative of the group making the recommendation.

Nominations should briefly describe the candidate’s qualifications and the group or field for which the candidate is being nominated, including contact information and indicating the candidate’s acceptance of the appointment if offered.

Nominations should be submitted to Larry Good, executive secretary, ERISA Advisory Council, Room N-5623, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210 or to good.larry@dol.gov. Recommendations must be submitted on or before September 15, 2009.

We think this is a great opportunity for anyone who is interested in influencing policy under ERISA and we would be especially pleased to see some fi360 members, with their knowledge of fiduciary processes and dedication to promoting a culture of fiduciary responsibility, represented on the Council.

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.

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.