Adviser groups blow tops over House bill's ‘hat-switching' clause

Critics claim the provision renders fiduciary duty requirement useless

Dec 15, 2009 @ 1:01 pm

By Sara Hansard

Investment adviser groups are up in arms about a one-sentence provision buried in the sweeping financial services reform legislation approved last week by the House of Representatives that would allow brokers to provide advice under a fiduciary standard and then execute that advice under a lower suitability standard.

The legislation, if enacted, would require the Securities and Exchange Commission to write rules that would establish a fiduciary duty for brokers who provide investment advice. However, the bill adds a qualifier to that requirement: “Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities.”

The provision was added to cover discount brokerage firms, such as Charles Schwab & Co. Inc., according to lobbyists working on the legislation.

The so-called hat-switching provision essentially renders the fiduciary duty requirement useless, say critics.

“That could be read to eviscerate fiduciary duty,” Marilyn Mohrman-Gillis, managing director of public policy for the Certified Financial Planner Board of Standards Inc., said of the provision.

The CFP Board is part of the Financial Planning Coalition, which has called for adopting traditional fiduciary standards for brokers who provide advice.

“It's OK to hat-switch” under the provision, said Neil Simon, vice president of government relations for the Investment Adviser Association. Under the clause, “The duty applies only at the time the advice is given. It does not extend throughout the relationship.”

Allowing brokers to “switch hats” between the two standards of care would confuse clients, he adds.

Fiduciary standards that investment advisory firms have come under require that advisers act in the best interest of their customers. Suitability standards that brokers are required to abide by require that investment recommendations be suitable for clients.

Fiduciary standards generally require more disclosure from advisers concerning possible conflicts of interest. Advisers who are held to fiduciary standards also face greater liability for the investment recommendations they make.


What do you think?

View comments

Recommended for you

Featured video


Dynasty's Penney: Top RIA trends for 2018

What's next for RIAs? Dynasty's Shirl Penney talks about the growing numbers of entrepreneurial advisers. Plus, what inspired his own entrepreneurship.

Latest news & opinion

Nontraded BDC sales in worst year since 2010

The illiquid product's three-year decline is partially due to new regulations and poor performance.

Tax reform debate sparks fresh interest in donor-advised funds

Schwab reports new accounts up 50% from last year, assets up 33%.

Nontraded REITs to post worst sales since 2002

The industry is on track to raise just $4.4 billion, well off the $19.6 billion it raised just four years ago, as new regulations hinder sales.

Broker protocol for recruiting a boon for clients

New research finds advisers whose firms have joined the agreement take better care of customers.

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print