End the confusing muddle of advice standards

If you thought the protracted and contentious issue of establishing a clear, uniform standard for adviser conduct was over, think again. 

As reported, the Department of Labor sent its latest revisions to a rule governing advice standards for qualified retirement plans to the Office of Management and Budget for review and approval in late November. Even if the OMB approves the changes quickly, however, the new rules would be published during the final 60 days of the current administration, which would make them “midnight regulations” that are subject to rescission by the incoming administration, which is very likely. That would leave the rules governing advice for IRAs, 401(k)s and other qualified retirement savings plans in limbo.

Establishing an easily understood advice standard for advisers — whether those advisers deal with investor assets held in or outside qualified retirement accounts — shouldn’t be taking so long and shouldn’t be so difficult.

Clients, if they think about the issue of standards at all, typically say they want one requiring their adviser to put client interests first, especially when advice, rather than a transaction, is what is being sought. Of course, that requirement defines a fiduciary responsibility, and currently some advisers act as fiduciaries all the time, but some act as fiduciaries only some of the time.

Given what’s likely to happen with the DOL rules, the muddle over when and to what degree an adviser is acting as a fiduciary no doubt will continue.

To be sure, the Securities and Exchange Commission’s Regulation Best Interest, which went into effect in June, was designed to beef up the suitability standard of the broker-dealer world and reduce confusion. But in requiring registered representatives to act in a client’s “best interest” but not requiring them to be fiduciaries in the 1940 Act sense, the regulation continues the muddle for investors and firms alike. For example, it allows broker-dealers to weigh their interests against those of clients when making recommendations. 

WHICH HAT?

The regulation’s Customer Relationship Summary, or Form CRS, which broker-dealers and registered investment advisers must now complete, is intended to clarify the issue by shedding light on the roles and conflicts of brokers and RIAs, particularly when they are one and the same person. But for clients of dually registered advisers, there is no clear way of knowing when an adviser is wearing a broker hat or an adviser hat, even if a client reads the CRS hat descriptions. 

Investors deserve greater clarity. Since it’s probably impossible for a single uniform standard to square the circle and have brokers act as fiduciaries without being fiduciaries, one possible route to a solution could involve retaining, but modifying, current suitability and fiduciary standards. Perhaps advisers and their corporate employers or supervisors shouldn’t be both a fiduciary and a non-fiduciary simultaneously.

In other words, advisers would have to pick a hat. If each type of adviser was also required to clearly disclose which hat they were wearing and its inherent conflicts, much like the current CRS requires, investors would have a clearer picture of their advice provider and could choose the type of adviser they prefer.

But that and other clarity ships probably have sailed; the muddle is likely to continue.