Outside voices and views for advisers

The case for a single fiduciary standard based on the Investment Advisers Act of 1940

A single standard would both protect investors and simplify regulation

Jun 20, 2017 @ 9:00 am

By Charles Goldman

As the industry continues to wait for more clarity on the ultimate future of the DOL fiduciary rule, there is no shortage of public debate. Although the Labor Department declined to further delay the rule and partial implementation began on June 9, many still believe the rule will be repealed after the DOL finishes its full review ordered by President Donald J. Trump. The debate is still very much alive. Proponents of the rule cite a fear that by abandoning it we will miss a key opportunity to better protect investors. In contrast, those opposed to the rule often point to the inefficient regulatory burdens it creates. Both sides have valid concerns.

Yet there is a clear solution that makes sense from both an investor protection and regulatory simplification standpoint. The Securities Exchange Commission must establish a single fiduciary standard for financial advice based on the Investment Advisers Act of 1940. Not only is the Act of 1940 the gold standard for investor protection, it offers the simplest regulatory path. Fortunately, the chairman of the SEC recently solicited public comment on investment-advice standards, suggesting a potential willingness to take action.

(More: DOL fiduciary rule takes effect, but more uncertainty lies ahead)

As a clear, principles-based standard, the Act of 1940 is most effective in ensuring investors receive conflict-free financial advice. In fact, the standard has worked exceptionally well for years with registered investment advisers, who are required to follow it. The success of the standard is due in large part to its simplicity: Advisers have a clear and undisputable duty of care to put investors' interests above their own. They also have an equal duty to avoid conflicts of interest. If conflicts do exist, they must clearly disclose them in writing to their clients. These principles are concrete. Advisers must follow them regardless of the circumstance. In contrast, complicated rules-based standards like the current DOL rule include endless guidelines and exemptions for every possible scenario. This only introduces confusion and loopholes. With the Act of 1940, there's no confusion: Put investors' interests first no matter what.

In applying the Act of 1940 to all financial advice, we will also protect investors by removing the flawed suitability standard that brokers currently follow. Under this standard, brokers are only required to select investments that are "suitable" for their clients. This is a joke. Anyone giving financial advice must be required to put investors' interests above their own in all cases. As a result, any solution to the DOL rule debate needs to start with getting rid of the suitability standard.

Investor protection aside, establishing the Act of 1940 as the single fiduciary standard is also a far simpler regulatory option. The SEC already enforces the Act of 1940 for RIAs. It might need to expand its staff to take on the added responsibility of all brokers and advisers, but that is a far easier task than creating a whole new standard under a different regulatory body. Also, the SEC already has a robust enforcement arm, whereas the DOL does not have any enforcement capacity. That means if the DOL rule moves forward, potential violations would be litigated in the courts, subjecting advisers and broker-dealers to costly legal proceedings. That is not how you build consensus around regulation.

(More: DOL fiduciary rule: What's wrong with the financial advice industry?)

The Act of 1940 would also reduce overall confusion for both advisers and investors. Advisers and brokers would only need to follow and understand a single standard, as opposed to the multiple ones that currently exist. For investors, they would know that in all situations their adviser is required to put their interests first.

As we debate the DOL rule, concerns about both improving investor protection and avoiding cumbersome regulation are valid. Yet as an industry, we need to recognize that there is a simple solution that adequately addresses both anxieties. Making the Act of 1940 the universal fiduciary standard for financial advice under the SEC will go farther than ever before in protecting investors. It's also the simplest regulatory solution. What more is there to discuss?

Charles Goldman is the president and CEO of AssetMark Inc.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 02


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


The #MeToo movement and the financial advice industry

Attendees at the Women to Watch luncheon commend the #MeToo movement for raising awareness about the issue of sexual harassment and bringing women together.

Latest news & opinion

DOL fiduciary rule: Industry reacts to Fifth Circuit ruling

Groups on both sides of the fiduciary debate had plenty to say.

Fifth Circuit Court of Appeals vacates DOL fiduciary rule

In split decision, judges say agency exceeded authority.

UBS, after dumping the broker protocol, continues to see brokers come and go

The wirehouse has seen 14 individuals or teams leave and five join for a net loss of $2.4 billion in AUM

Merrill vets ready to recharge breakaway recruiting efforts

After regrouping in wake of broker-protocol exits, Snowden Lane Partners is ready to recruit wirehouse brokers and RIAs.

Ron Carson: I'll leave Cetera if it's sold to LPL

Head of the Carson Group, who was affiliated with LPL for 28 years, tells his 48 partner firms he has no intention of returning to his old broker-dealer.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print