While federal regulators debate rules that would raise investment-advice standards, one organization dedicated to promoting a fiduciary standard is taking matters into its own hands.
The Institute for the Fiduciary Standard, a think tank whose purpose is to promote a fiduciary standard in the advice industry, announced Tuesday that it is establishing a board of advisers to outline best fiduciary practices for advisers. Led by Vanguard founder John “Jack” Bogle and Boston University professor Tamar Frankel, the board will introduce the guidelines by the end of the year and put them out for public comment.
After the best practices are finalized, the organization plans to accredit advisers who follow them.
The effort has been spurred in part by the continuing delays by the Securities and Exchange Commission and the Labor Department, as each agency considers proposing fiduciary-duty rules, according to Knut Rostad, president of the institute.
The other motivation is the fact that investors are confused by investment-advice standards and have grown to distrust the financial markets, he said.
“There is evidence that investors don't believe fiduciary advisers exist at all,” said Mr. Rostad, the regulatory and compliance officer at Rembert Pendleton Jackson. “That should be worrisome to fiduciary advisers.”
The best practices likely will resemble the
six fiduciary duties that are currently outlined on the organization's website. They include acting in the client's best interests with good faith and prudence while avoiding conflicts of interest, disclosing “all material facts” and controlling investment expenses.
Under current rules, investment advisers must act in the best interests of their clients. Brokers are held to a suitability standard when they sell investment products, which allows them put their clients in higher-priced products as long as they meet their investment needs.
The Dodd-Frank law gave the SEC the authority to promulgate a regulation that would impose a uniform fiduciary standard for retail investment advice. The agency is considering whether to propose such a rule. Meanwhile, the DOL is poised to re-propose a rule later this year that would expand the definition of “fiduciary” under federal retirement law.
The efforts of both agencies to come up with acceptable fiduciary guidelines are controversial and have supporters and detractors within the financial advice industry.
As a result, the advice sector should not rely on the regulators, said Mr. Rostad, who is concerned that a SEC rule may water down the fiduciary standard currently applied to investment advisers.
“The profession itself needs to take a strong stance,” he said. “Fiduciaries have to act. They have to clearly establish how they are different from other investment professionals and what it is that makes them preferable to other investment professionals.”
