Using the Trump doctrine on regulation, we have landed upon an preliminary solution to the epic debate regarding a uniform fiduciary duty (UFD) for providers of personalized investment advice.
While we certainly want the Securities and Exchange Commission (SEC) and the Department of Labor (DOL) to continue their work toward a codified UFD, investors and retirement savers continue to suffer for want of clarity around adviser services and the continued onslaught of mis-selling and ill-informed choices.
Specifically, they need to understand who is selling what to whom and where allegiances lie.
{mosads}There’s a simple way to do this using the Trump framework of no new regulations, no new compliance costs for industry and putting a well-placed drain in one of the murkiest realms in the swamp. Simply put: Regulate titles, eliminate the “incidental advice” loophole and require agent disclosure. Let me explain.
Step one: investment adviser vs. financial advisor
Generally, investment advisers are registered with the SEC and operate under a fiduciary standard of care. In contrast, a broker-dealer is a registered representative of a brokerage firm and acts in the legal interests of the firm.
They very often refer to themselves as “financial advisors,” but they operate under a completely different (lower) standard of care than a registered adviser.
The proliferation of this financial advisor title has not only caused confusion on the part of mom-and-pop investors, they incorrectly assume the advice they get is “personalized investment advice” and in their best interest.
In our view, all those professionals who provide personalized investment advice means they must register under the Investment Advisers Act of 1940. This registration will place these professionals under a fiduciary standard, regardless of what the title the provider uses to refer to him or herself.
Step Two: incidental advice
The way in which brokers market access to personalized advice and/or actually provide personalized investment advice without adhering to a fiduciary standard is by claiming their advice is “incidental to” the broker’s work in selling/recommending investment products.
Again, like regulating the meaning of titles, the definition of “incidental” is a fairly easy fix, and it’s well within the administrative authority of the SEC to clarify an existing rule by the issuance of administrative guidance.
Clarification that providing personalized investment advice, or implying such advice through the title “financial advisor” is not incidental to the work of a broker, will end misplaced reliance by brokers on this loophole and send a clear message that brokers must come into compliance with guidance on personalized advice and titles.
The current reliance on “incidental” language clearly puts many investors at a disadvantage and honestly, gives brokers an unfitting advantage over suitably registered investment advisors.
Step Three: agent disclosure
Finally, a relatively straightforward solution to transparency is the requirement of prominent, clear, consistent and ongoing disclosure by brokers to their clients that they are agents of the brokerage firm that employs them and that they do not legally represent their clients’ interests. People in our society fully understand the dynamics and motivations of a salesperson relationship if they are told.
Sorting out an effective uniform fiduciary duty for retirement and non-retirement accounts by the SEC and DOL may likely take some time.
While the care with which the matter is considered will accrue to investors and the financial services industry alike, the above proposals offer investors and the industry practical relief today and a path forward for developing a uniform financial duty.
Kurt N. Schacht, JD, CFA, is managing director of the advocacy division of CFA Institute, a global association of investment professionals.