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Marketing & Technology For Independent Financial Advisors


Feds Want All FAs To Be Fiduciaries

Way back on page 72 of the regulatory reform white paper released yesterday by the U.S. Treasury is some pretty big news for financial advisors.

“We propose the following initiatives to empower the SEC to increase fairness for investors,” says the Treasury white paper. “Establish a fiduciary duty for broker-dealers offering investment advice and harmonize the regulation of investment advisers and broker-dealers.”

Entitled, Financial Regulatory Reform: A New Foundation, the white paper makes official the Obama Administration’s intention to put registered reps and advisors at RIAs under the same set of regulatory rules. That’s not a surprise to anyone.

“Retail investors are often confused about the differences between investment advisers and broker-dealers,” according to the white paper. “Meanwhile, the distinction is no longer meaningful between a disinterested investment advisor and a broker who acts as an agent for an investor; the current laws and regulations are based on antiquated distinctions between the two types of financial professionals that date back to the early 20th century. “

What is a surprise is that the Administration is asking to impose a fiduciary obligation on brokers. Of course, only advisors at RIAs are now fiduciaries, and thus obliged always to do what is in a client’s best interest. That is a much higher standard of care for clients than is imposed on registered reps, who must only ensure they are giving advice suitable for their clients.

The Treasury says in the 89-page paper that RIAs and Registered Reps are the same to retail investors. “In the retail context, the legal distinction between the two is no longer meaningful,” says the Treasury white paper. “Retail customers repose the same degree of trust in their brokers as they do in investment advisers, but the legal responsibilities of the intermediaries may not be the same. The SEC should be permitted to align duties for intermediaries across financial products. “

“Standards of care for all broker-dealers when providing investment advice about securities to retail investors should be raised to the fiduciary standard to align the legal framework with investment advisers,” according to the Treasury Department. “In addition, the SEC should be empowered to examine and ban forms of compensation that encourage intermediaries to put investors into products that are profitable to the intermediary, but are not in the investors’ best interest.”

The Administration is calling for new legislation:

requiring that broker-dealers who provide investment advice about securities to investors have the same fiduciary obligations as registered investment advisers
providing simple and clear disclosure to investors regarding the scope of the terms of their relationships with investment professionals
prohibiting certain conflict of interests and sales practices that are contrary to the interests of investors.

The effort to regulate advisors at RIAs like registered reps seems unstoppable. Like it or not, it’s what the Administration wants, and consumer groups, like Consumer Federation of America, also are backing this effort.

We don’t know how this would be done, of course. But it’s likely FINRA will be charged with the task. RIAs should expect, perhaps as early as 2010, much higher costs for compliance.

Imposition of the fiduciary standard on registered reps—if this catches on—will rob RIAs of a huge marketing advantage. Accepting the responsibility to always do what is in a client’s best interests is a real differentiator for RIAs. It’s hard to imagine how the fiduciary standard would be applied to brokers who accept commissions as well as fees. Any comments from readers clarifying that part of the proposal would be appreciated.

It seems likely that making all advisors say they will act as a fiduciary will water down the meaning of the term. While the Financial Planning Coalition—the group comprised of Financial Planning Association, National Association of Personal Financial Advisors, and the CFP Board of Standards—today issued a release applauding the Administration for proposing the imposition of the fiduciary standard on brokers, I am not as sanguine. I suspect that advisors who today are fiduciaries are going to have a tough time differentiating the way they give retail advice from the way brokers who are fiduciaries do it.

3 Responses to “Feds Want All FAs To Be Fiduciaries”

  1. June 29th, 2009 at 6:46 pm

    Robert Hanten says:

    I really question who will take care of the 90% of Americans who have less that $100K of financial assets. (Check the FRB Survey of Households for that statistic) The vast majority of Americans simply don;t have the assets or the cash flow to pay for fee based investment management. We will, by accident, design a financial services industry that can only adequately serve the upper 10% of asset holders.

    I have Googled fiduciary and small accounts and I can find no discussion about this. I did see where State Farm had banned the CFP designation because the CFP Board doesn’t want a fiduciary to act as an agent for the company because that is a conflict. So will advisers no longer be allowed to sell life insurance and annuities? That would be the most forthright approach. Has anyone thought this through? I think the FPA will get their fiduciary standard and find out that they should have been more careful about what they asked for.

  2. August 15th, 2009 at 7:46 am

    Steve Smith says:

    I left a b/d in 2007 due to rule 151a, as I sold a ton of indexed annuities, as I was sick of clients losing money. Never had a client complain EVER about EIAs; then had to rejoin in 2009 due to the fact that EIAs will become securities. And I do a lot of closed end business; now this crap. The real effort should be against the plethora of products; in my opinion this is stealth SHARIAH law that Obama wants for the USA. It will shut won 2/3 of brokers, to about 200,000….from 600,000..thanks Obama, insah allah!

  3. August 21st, 2009 at 2:32 pm

    Fred Jin says:

    I have to disagree with the author’s assertion that RIAs will have a more difficult time differentiating themselves from their IAR counterparts, if both have a fiduciary duty. My experience with my clients and prospects are they believed/assumed that both should/are acting in a fiduciary capacity.

    In the interest of the general public, I would like to see the playing field leveled. Should I be careful for what I wish for? I don’t think so.
    Removing those who prey and abuse the ‘trusted relationship’ we need to advise and assist our clients in their financial dealings, will only help us better serve our clients and remove some of the cynicism our client have acquired.

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