In my last Fiduciary Corner column, I wrote about the significant benefits that would result if, as a result of regulatory reform, all who provide financial advice — including broker-dealer representatives — are held to the fiduciary standard of care established under current laws.
Recently, Securities and Exchange Commission member Luis Aguilar proposed some key components of a rigorous regulatory framework. In a speech delivered May 7 at the Investment Advisers Association's annual conference, Mr. Aguilar said: “There is only one fiduciary standard and it means that a fiduciary has an affirmative obligation to put a client's interests above his or her own.”
This is a fundamental fact and an essential requirement that must not be compromised in the regulatory-reform process.
Mr. Aguilar also provided an overview of legislative, regulatory and case law substantiation for the fiduciary standard, and distinguished it from a “universal” standard of care or other fiduciary-like constructs that could be concocted.
He understated the problem of alternative constructs by saying: “It is not clear to me that any of these standards measures up to the fiduciary standard that currently exists, and there is great concern that these proposed standards may have the effect of diluting the existing high fiduciary standard that serves as an important investor protection.”
Then there's the question about who should have the responsibility for regulatory oversight if brokers who render advice and investment advisers were subjected to a common standard.
In this regard, Mr. Aguilar demonstrated that there is an obvious answer. His simple yet telling observation is that the Investment Advisers Act of 1940 set up a structure under the purview of the SEC with the specific purpose of regulating advice providers. Broker-dealers were exempted only because, at the time, brokers didn't give advice.
And while the business model of advisers hasn't materially changed, “with the advent of fee-based brokerage accounts in the 1990s, broker-dealers have been increasingly selling programs that regularly provide "investment advice' in exchange for "special compensation' in the form of an asset-based fee,” Mr. Aguilar said.
In effect, they became investment advisers.
Given the indisputable truth of this observation, Mr. Aguilar concluded: “The SEC already has the infrastructure and the expertise in place. It will be the most cost-effective solution for the industry as well as the best solution for investors. There doesn't seem to be any logical reason for reinventing the wheel. All that the SEC needs is the funding.”
Mr. Aguilar's two key points fit hand in glove: There is one authentic fiduciary standard for the provision of advice and there is one established entity (the SEC) designed to regulate advisers. It only makes sense to acknowledge and accept the central role the authentic fiduciary standard of care plays in any advisory relationship, and recognize the SEC's established position as the regulator of advisory services. This will avoid the need for radical regulatory reform and allow attention to be focused on bringing brokers who give advice under the established fiduciary standard and SEC oversight.
When compared to Mr. Aguilar's assertions, the logic of the more publicized proposals for “universal” standards, which meet in the middle of commercial and fiduciary, and for a self-regulatory organization such as the New York- and Washington-based Financial Industry Regulatory Authority Inc., is not nearly as clear.
A universal standard of care values convenience over what is best for investors. Meanwhile, Finra as a regulator puts rule-making authority in the conflicted hands of a financial-services-company membership organization.
It is encouraging to see that there is a voice on the SEC who is advocating for what is best for investors and for the investment advice profession.
There is an opportunity now to let the SEC and legislators know that Mr. Aguilar's positions have broad-based support in the investment management field. If you find Mr. Aguilar's positions on these matters as compelling as I do, I urge you to express your support by writing to all five SEC commissioners and your elected representatives to advocate for their adoption. Contact information and a copy of the letter I sent to the SEC on this topic are available at fi360.com under the “resources” section of the website.
Blaine F. Aikin is president and chief executive of Fiduciary360 LP in Sewickley, Pa.
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