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Investors need high standards

By Sheyna Steiner ·
Monday, January 24, 2011
Posted: 5 pm ET

Last summer, the Securities and Exchange Commission was empowered by the Dodd-Frank Act to study the need for a higher standard of care when giving financial advice to investors.

Currently only registered investment advisors are held to the most stringent standards, known as the fiduciary standard. They must work in the client's best interest and avoid conflicts of interest.

Brokers on the other hand are held to a suitability standard which basically requires that the investment be suitable.

The problem is that investors may not be aware of the difference and that can cost them.

On Friday, the SEC delivered their study and recommendations to Congress. Their recommendation was for a uniform fiduciary standard of conduct for broker-dealers and investment advisors. Conflicts of interest should be either avoided or disclosed.

It sounds like good news, but there may be room for interpretation with some of the recommendations. I spoke with Blaine Aiken, CEO of Fiduciary360, a fiduciary education firm, to find out what investors can expect.

Leading up to the release of Friday's report there was a lot of speculation about the various avenues the SEC study could take. Were you surprised at the study and recommendations?

In a sense I was. I was certainly gratified that it did strike so strongly in the direction of fiduciary responsibility.  I do think it would have been preferable if they had picked from among the three options and moved directly on to rulemaking, but it's certainly a step in the right direction.

I'm particularly gratified that they talked specifically about the fiduciary duties of loyalty and due care, but now there is certainly some language in there that leaves some room for interpretation.

Which part specifically could be up for interpretation?

The most important thing was saying that the fiduciary standard should be upheld in the giving of advice to retail investors and that standard includes loyalty and due care.

That is extremely important.

But there are references to the possibility that whenever there are conflicts of interest, those conflicts need to be avoided or disclosed.

That 'or disclosed' gives me some pause and some level of concern over how the rules will ultimately be drawn because the fiduciary standard is pretty clear that, first and foremost, the investor's interest must be served and disclosure is not an adequate means of ensuring that.

The question of business models is one that leaves a lot to interpretation as well.

But what I think is very important is the study clearly emphasized that the standard that is enacted should be no less rigorous than that imposed by the investment advisory act of 1940.

It was very clear that fiduciary duty must respect the obligations of duty of loyalty and duty of care.

I'm hopeful that when you use those as your touchstones it will continue to recognize that disclosure in and of itself is not sufficient. First and foremost, conflicts need to be avoided and in those circumstances where they can't be avoided, they must be mitigated in the best interest of the client.

What would be an unavoidable conflict of interest?

There might be circumstances where there is a limited selection of investments that an advisor has to offer in a very specialized circumstance and perhaps there is compensation that would be higher for one investment over another. There could be circumstances where, when you take all things into account, the best investment happens to be the one with the higher expenses.

That, I would say, would be an unavoidable conflict.

What can investors expect if the strong fiduciary standard makes it into the rules without being watered down?

They can expect to have truly trustworthy advice. They can have the confidence that those that are providing the advice can be held accountable for the advice they provide.

What you have under the fiduciary standard is the obligation, pure and simple, to serve the best interests of the client; to avoid conflicts of interest; to provide full and fair disclosure. All of those things are critical.

In financial services now, you can have people who are giving advice and you are not necessarily sure if they are obligated to act in your best interest.

The analogy we use is that it's like you walk into a facility marked healthcare and everybody in there is operating with a white coat. Some people are pharmaceutical reps and some are doctors and you don't have a good way of knowing which is which.

That's not typically how you would want to get your medical advice and it's not the way you should get your financial advice either.

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Sheyna Steiner
January 26, 2011 at 2:09 pm

Perhaps you're referring to something else.

The Dodd-Frank Act was passed by Congress and signed into law by the president.

January 26, 2011 at 1:04 pm

Why can lawyers charge 45% in fees and no one will put a max on how much they can charge. A broker has a cap

Why now stop the investor from playing gambling with money they can’t afford lose.
If a client is retired they should not be able to invest in any market.
If a client is not working and don’t have a net worth of a million dollars they should not be able to invest in the market.
If they have a net worth of a million dollars only be allowed to invest 25 % of the net worth.
The lawyers are the only ones wining in these lawsuits. Max the fees.