Advisers need to prepare for a heightened level of duty as the trend continues toward stricter standards of care, especially in the area of retirement plans, said Blaine Aikin, chief executive of fi360, during a session at the Schwab Impact conference Friday.
The Labor Department's proposed fiduciary definition could be particularly nettlesome, he said. The five-part definition would be open to interpretation, “and there's a lot of heartburn over the fact that it would extend to advice provided to IRA holders,” said Mr. Aikin, who is also a member of the Committee for the Fiduciary Standard, an advocacy group. “That would bring in a lot of people from the brokerage and insurance industries.”
Mr. Aikin said he had a chance meeting at lunch several months ago with Phyllis Borzi, assistant secretary for the DOL's Employee Benefits Security Administration, who has been pushing for the controversial revision.
“She was emphatic that this is going forward, if she was still there after the election,” Mr. Aikin said. Ms. Borzi is expected to keep her post following President Barack Obama's re-election.
In addition, the department's new cost-disclosure rule for retirement plans is making plan sponsors aware of fees, Mr. Aikin said. The rule “is among your best friends” because it “provides the evidence of what other people are charging and what they're doing,” he said.
It is a “nightmare” for those providers with lots of conflicts in the products they sell, he added.
Regarding the Securities and Exchange Commission's effort to develop a uniform fiduciary duty for anyone giving personalized investment advice, Mr. Aikin said the brokerage and insurance industries are “are pushing hard to make it more of a disclosure-based regime.”
He doesn't believe that's a good approach, however. “Fundamentally, disclosures don't work …" he said. "Study after study show [that] telling investors your interests are not aligned tends to disarm them.”
Furthermore, Mr. Aiken said, disclosures historically have not been enough to meet a fiduciary standard.
The Financial Industry Regulatory Authority Inc.'s suitability rules, which went into effect July 9, also have “fiduciary overtones,” he said. They expand the know-your-customer standard, require reasonable diligence in formulating recommendations and recognize that customers can rely on a brokerage firm or associate, he said.
“This last one is really interesting," Mr. Aiken said. "If clients may rely on the firm and the associate, that is one of the core things that goes back to the fiduciary standard.”
The trends toward a higher standard of care “are unmistakable,” he concluded. He suggested that advisers aim to enhance their professional credentials, and invite clients to compare their services and pricing with those of competitors.