Raging in the financial services industry today is a fiery debate over whether investment advisers and broker-dealers (BD’s) should be held to a uniform fiduciary standard and what that standard should be. Though the line between the two camps is not always easy to draw, advocates are commonly seen as taking an investor-centric perspective with less regard to the impact on the industry, and critics are commonly seen as taking an industry-centric perspective with less regard to the impact on the investor. It’s obvious that the public should be protected, but protecting the investor may be contingent on a BD business model that maintains investor access to a broad choice of solutions without driving up costs.

Impact on investors and financial professionals

Whatever regulatory action is taken, there will be practical implications for both investors and financial professionals. With millions of financial service professionals in the U.S. managing trillions in investor money, new regulation will likely impact both variables in the financial advice equation.

For investors, at stake are their “best interest” as well as continued affordability and access to a broad choice of solutions. The financial services landscape, where advice and sales overlap, can be confusing. As shown by the 2008 SEC-commissioned RAND Report, investors trust BD’s and investment advisers who hold themselves out as providing advice at exactly the same level and assume that professionals providing similar services are subject to the same regulatory and legal requirements.

A uniform fiduciary standard would also impact financial professionals and their business models, possibly affecting the number and size of financial firms. Applying the investment adviser standard to BD’s may level the playing field for them and strike at the heart of the advisers’ value proposition. Further, harmonizing regulation may involve importing existing BD requirements to advisers or “watering down” the fiduciary standard currently in place for advisers. Separating product manufacturing and sales firms from advisory firms may also be a challenge.

Ethical questions and key definitions

The debate raises ethical questions about investors’ “best interest.” Julie Ragatz, Director of The Cary M. Maguire Center for Ethics in Financial Services at The American College, notes the inherent challenges in defining a uniform standard and measuring its efficacy. She writes in response to SEC’s request for public comment: “The key question is what standard(s) of care will be in the ultimate best interest of all retail investors, at all income and asset levels, when costs and availability of products and services are considered”. She adds: “…it is difficult to determine how to define this standard, difficult to determine when this standard has been met and difficult to determine that practitioners held to the fiduciary standard are meeting this standard while other practitioners held to different standards are not”.

Some have outlined foundational principles for a uniform standard. The Committee for the Fiduciary Standard advocates that all investment and financial advice meet the requirements of five core fiduciary principles: putting the client’s best interests first; acting with prudence; never misleading clients; avoiding conflicts of interest; and fully disclosing and fairly managing, in the client’s favor, unavoidable conflicts. Similarly, The Institute for the Fiduciary Standard identifies the “ethical” criteria of fiduciary duties as the “core elements of what we think of as character” and views these criteria as providing “the foundation for best practices regarding conflicts, fee/expense transparency, and communications”.

To examine investors’ “best interest”, parallels have been drawn comparing the broker-investor to the doctor-patient relationship. Unlike the medical profession, the standards for financial services vary by practice area. Yet assuming the parallel is valid, it’s worth asking: if the ‘patient’ must decide whether to accept a recommended treatment involving risk, is the doctor’s responsibility limited to disclosing the risk, or does it entail a higher standard of care and loyalty? What if the doctor – professionally or financially – profits from recommending that treatment, but the treatment is suitable and affordable for the patient?

Stay tuned for Part 2 – Analyzing the perspectives supporting and opposing the Uniform Fiduciary Standard.

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