As regulators struggle to reform investment advice rules, a group of advisers and investor advocates is encouraging clients to seek a higher standard on their own.
With the Labor Department's fiduciary rule teetering on the
brink of death and the Securities and Exchange Commission setting off on a potentially
long rulemaking process, the Committee for the Fiduciary Standard is renewing a push for its fiduciary oath.
The
one-page document outlines five fiduciary principles a financial adviser must follow to put the client's interests ahead of their own. They include acting with prudence, not misleading the client, avoiding conflicts of interest, and disclosing and managing unavoidable conflicts.
The oath, meant to be printed out and signed by an adviser, has been around
for several years. But recent events, such as the 5th Circuit Court of Appeals striking down the DOL rule, have increased the urgency to get it into circulation, according to Patti Houlihan, chairwoman of the committee.
"With the 5th Circuit ruling, it is just so important to have this oath out there because it states fiduciary principles," said Ms. Houlihan, president of Houlihan Financial Resource Group. "The oath is the answer, given that the DOL rule is gone."
Investment advisers already must act as fiduciaries. Brokers are held to a suitability standard that requires them to sell products that meet a client's needs but also gives them latitude to recommend those that produce the most revenue for the broker.
Kathleen McBride, founder of FiduciaryPath, a consulting firm, said even well-meaning brokers who want to act in their clients' best interests may not be able to do so in practice because of their firms' product platforms and compensation policies.
"We think this helps sort out who is willing and able to act as your fiduciary from someone who may want to but is hampered by the way their firm is set up," said Ms. McBride, a member of the committee. "There's nothing in that oath that anyone providing advice shouldn't be doing anyway."
But a securities lawyer said brokers should be cautious about signing the oath — or other documents like it — while new advice regulations are being developed.
"It's not clear to me that it's fair to ask a broker to jump ahead of the regulatory process before it's worked its way through and to make assurances that may or may not be consistent with how everything shakes out," said Andrew Oringer, partner at law firm Dechert.
A financial adviser may be hesitant to sign a document that has not been vetted by the firm's compliance department, said Charlie Fitzgerald, principal at advisory firm Moisand Fitzgerald Tamayo.
"If they really want that client's business, they're going to come up with their own document that will satisfy that client," Mr. Fitzgerald said.
The SEC is proposing a
Form CRS, or client relationship summary, that is designed to help investors understand differences between investment advisers and brokers. It is supposed to be no more than four pages long.
Ms. Houlihan asserts the fiduciary oath is more straightforward.
"Consumers don't read four pages of legalese," she said. "You can read our oath and see exactly what it is saying."
One question is whether the oath would hold up in court or in Finra arbitration if a client accuses a broker of breaking it.
"If it's signed, it's a contract," Ms. McBride said. "I don't know about arbitration. It's really hard to tell."
But if a broker signs it, she's taking a litigation risk, according to Mr. Oringer.
"You're creating potential causes of action that might not have been there," he said. "I would encourage a broker to craft his or her own assurances, rather than accept someone else's. I would sit down with the customer, explain how I intend to address the customer's best interests and see if that is enough to put the customer at ease."
