Fiduciary Corner

Blaine F. Aikin

Titles advisers use to play a bigger role in fiduciary regulation

Even opponents of the DOL rule appear to be zeroing in on titles that cause confusion with the investing public

Jan 6, 2017 @ 1:01 pm

By Blaine F. Aikin

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Traditionally, regulation has focused on the functional definition of fiduciary. That is, fiduciary status is triggered by what you do, not what you call yourself. While that is largely true of the Department of Labor's conflict-of-interest rule as well, the rule does plow new ground by saying for the first time that holding out as a fiduciary means you are one. As simple as that may sound, it wasn't true in the past. And though uncertainty prevails around the future of the fiduciary rule under a new administration, there are clear indications that the titles financial advisers use will play a bigger role in fiduciary regulation going forward. Even opponents of the DOL rule appear to be zeroing in on titles that cause confusion with the investing public.

Last month, we had a preview of what the debate over a new fiduciary standard might look like in the form of legislation passed by the House of Representatives. House Bill 5983, the Financial Choice Act of 2016, was authored by House Financial Services Committee Chairman Jeb Hensarling, R-Texas, as part of a larger package to repeal much of the Dodd-Frank Reform Act and the DOL fiduciary rule. While the bill was never passed by the Senate and died when the 114th Congress adjourned, interest in accomplishing the bill's objectives lives on.

The bill would have required the SEC to submit a report on a number of issues related to the impact of a fiduciary standard on consumers and the industry, including a review of alternative remedies to a fiduciary standard such as “simplifying the titles used by brokers, dealers and investment advisers and enhancing disclosure surrounding the different standards of conduct currently applicable to brokers, dealers and investment advisers.”

Future regulation modeled more along the lines of HR 5983 would shift the regulatory emphasis from broadening fiduciary coverage (as captured in Dodd-Frank) to more clearly differentiating fiduciary from non-fiduciary practitioners through clearer titles and disclosure to protect investors.

One of the many complaints lodged by some investment advisers and consumer watchdog groups against the SEC has been the leniency shown toward brokers using fiduciary-like titles such as financial adviser or wealth manager without requiring fiduciary accountability under the law. This could change at the SEC with prodding by Congress.

State regulations are similarly oriented toward functional conduct but holding-out provisions may also apply and be of growing interest. For example, in 2015, the New York City Comptroller urged the New York state assembly to pass a bill that would require financial advisers to disclose whether they are fiduciaries and if they put their clients' interests ahead of their own.

While the overall future of fiduciary regulation is fuzzy as we enter 2017, it is certainly possible that a Dodd-Frank repeal bill, something along the lines of Chairman Hensarling's 2016 proposal, will receive serious consideration in both chambers this year. We could easily see holding-out options to clarify fiduciary accountability come up in new federal and state laws, as well as in new DOL or SEC rule proposals.

From a competitive perspective, investment professionals who already serve their clients in a fiduciary capacity are likely to welcome new holding-out rules, especially if the DOL rule is scaled back. Most fiduciary advisers market their higher standard of care as a significant competitive advantage. New holding-out rules and heightened disclosure obligations about the differences in conduct standards would allow them to press their advantage.

All things considered, it would seem that advisers who have started on the path to converting from non-fiduciary to fiduciary business models due to the DOL rule should keep heading in that direction. Firms that provide advice without adhering to fiduciary practices are at greater compliance risk today due to the substantial functional conduct standards that were in place even before the DOL rule (e.g. breach of fiduciary duty is the number one complaint against brokers). New holding out rules would exacerbate compliance risks and intensify competitive pressure as well.

Regulatory speculation may influence some tactical decisions, but the firms that maintain their strategic focus upon serving their clients' best interests are likely to fair best.

Blaine F. Aikin is executive chairman of fi360 Inc.

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