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Deadline for fiduciary duty

By Sheyna Steiner ·
Friday, January 21, 2011
Posted: 7 am ET

It's finally here, the day the Securities and Exchange Commission delivers the fruits of a six-month study on standards of care to Congress along with their recommendations.

It will be interesting to see what happens. 

On the one hand, some industry groups oppose a strict fiduciary standard and instead feel a disclosure-based standard would suffice to protect investors' interests.

John Taft, chairman of the Securities Industry and Financial Markets Association, wrote a blog post on on Wednesday. In "The real facts about fiduciary duty," he wrote:

"The results of this study, which was mandated by the Dodd-Frank Act, will have a profound effect on individual retail investors, especially the level of protection they receive and the array of investment choices offered by their financial advisor."

Under that logic, the higher standard of care would leave investors with fewer protections and less choice.

A story on earlier this month, "Disclosure at the center of fiduciary tug of war," explored that topic.

In a letter to the SEC, SIFMA made the case that clients should be able to get disclosure on conflicts of interest and waive those conflicts and buy the investment anyway -- if they want to.

The story then quotes Knut Rostad, chairman of The Committee for the Fiduciary Standard.

"Mr. Rostad argues that such an approach could put an investor in the unpleasant position of having to second-guess a professional adviser."

"In a fair-minded fiduciary world, the vast majority of conflicts should be simply avoided," Rostad said, in the article. "Those that can't be avoided need to be mitigated."

Of course, not all brokers are unethical or looking to take advantage of investors. Nonetheless, most people seek financial advice because they don't know what to do.

Unfortunately, most investors are unaware of the fact that the commissioned representatives offering them financial advice don't have to sell them products that are the best for them or the least fee-laden. That was proven in a survey back in September.

Besides a disclosure-based standard, the SEC could try to define fiduciary duty. That is somewhat worrying for registered investment advisers as they fear it will be watered down or needlessly circumscribed. The original standard was outlined in the Investment Advisers Act of 1940.

Finally, they could impose the true fiduciary standard on the whole industry. That would be a whole new can of worms.

Stay tuned to see what happens.

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