ICI chief favors fiduciary role for advisers

Stevens says it provides more 'responsibility and accountability'

Mar 8, 2009 @ 12:01 am

By Sara Hansard

In what might come as a surprise to the organization's members, the head of the mutual fund industry's biggest trade group last week said that he supports the idea of requiring all financial advisers to act as fiduciaries.

The fiduciary standard, which requires advisers to put their clients' interests first, "does provide a higher standard of responsibility and accountability," Paul Schott Stevens, president and chief executive of the Investment Company Institute of Washington, said in an interview after the group released a proposal for financial services regulatory reform.

"Isn't that something that all of our recent experience suggests is important?" he said.

Requiring all advisers to come under fiduciary standards could cause problems for the fund industry, however. Questions have arisen as to whether requiring a fiduciary standard could obligate advisers to recommend no-load or low-cost mutual funds, as well as exchange traded funds, which tend to have lower fees, over other products.

"In the past, the regulatory concern has been that only the lowest-priced product is the suitable product," said Terry Lister, chief regulatory officer for Waddell & Reed Inc., a brokerage firm based in Shawnee Mission, Kan. "I assume we're going to have the same issue with the fiduciary standard."

However, Mr. Lister said, "I think that's a false argument. I don't think being a fiduciary obligates you to only offer the lowest-priced product; it requires you to always do what's in the client's best interest and to remember you always have a conflict and [must] disclose that conflict."

Waddell & Reed Inc. is part of Waddell & Reed Financial Inc., also of Shawnee Mission. The latter owns Waddell & Reed Advisors Funds and the Ivy Funds, both of which are ICI members.

The parent manages $46 billion in mutual funds. About $20 billion of the assets are managed under the brokerage firm, which has 2,500 registered representatives.

Others agree with Mr. Lister.

"Just because one product may be more expensive, just by choosing that, you're not breaching fiduciary duty," said Brian Stimpfl, managing director of adviser advocacy and industry affairs for TD Ameritrade Institutional in Jersey City, N.J., which manages about $75 billion. Its president, J. Thomas Bradley Jr., is one of the few brokerage firm executives who has called for adopting a fiduciary standard for advisers.

"If you're looking at a mutual fund that's actively managed and you feel that's the right product for your client's objectives, there's no harm in choosing the more expensive investment product," Mr. Stimpfl said. However, requiring all advisers to function as fiduciaries could push fund sales in the direction of lower-cost funds, according to some advisers. Under a fiduciary standard, "you're transforming manufacturers' representatives, brokers, into purchasers' representatives. The effect of that will be to lower the total fees and costs charged by funds," said Ron Rhoades, chief compliance officer for Joseph Capital Management LLC of Hernando, Fla., which manages $70 million.


"If the fiduciary standard was fully and broadly enforced, then by definition, over time, it would have to favor the lower-cost vehicles," said Knut Rostad, deputy chief compliance officer for Rembert Pendleton Jackson, an advisory firm in Falls Church, Va., that manages about $500 million.

Mr. Rhoades and Mr. Rostad support a fiduciary standard for advisers.

Mr. Stevens isn't the only financial industry official who supports the idea of fiduciary standards for anyone who provides financial advice to customers.

"Giving investment advisers more of a fiduciary standard is necessary in this current environment," said Melissa Netram, director of regulatory and securities affairs for the Financial Services Roundtable, a Washington group that represents banks, brokerage firms, mutual funds and insurance companies.

Financial advisers who work for registered investment advisory firms must act as fiduciaries, while broker-dealer registered reps are required to make suitable recommendations to customers. Broker suitability regulations don't entail as much disclosure of possible conflicts of interest as fiduciaries are required to give, and they don't obligate putting client interests first.

The ICI's regulatory proposal didn't call for mandating that all advisers come under fiduciary standards.

Under the ICI's proposal, the Securities and Exchange Commission and the Commodity Futures Trading Commission would be merged into a "capital markets regulator" with responsibility for overseeing all financial investment products and for harmonizing regulations now governing investment advisers and broker-dealers.

Congress is likely to include re-form of the retail segment of the financial services industry as it takes up regulatory reform, Mr. Stevens said.

"In my experience, when you have had differing sets of standards in our financial services arena, they are rarely reconciled downwards," he said. "I expect a fiduciary duty will become the standard across advisers and brokers."

The idea of having a single regulator oversee brokers and investment advisers may not work for investment advisers, said Duane Thompson, managing director of the Denver-based Financial Planning Association's Washington office.

"To the extent that a capital markets regulator would oversee financial planning services, at first blush, it's doubtful that they would understand financial planning services and the distinction between that and selling products," he said.

E-mail Sara Hansard at shansard@investmentnews.com.


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