The long battle over investment advice standards can be traced to the different standards that apply when a broker sells a product to a client and then helps the same client manage his finances.
The fiduciary rule that applies to investment advisers, which requires that they act in the best interests of their clients, doesn't govern brokers when they offer advice that is "solely incidental to" product transactions, but theoretically would apply when they offered more extensive planning advice.
Over the years, brokers have been marketing themselves as financial advisers, but the Securities and Exchange Commission has looked the other way when it comes to making sure they are adhering to a best-interest standard, according to fiduciary advocates.
Now the
SEC is drafting a fiduciary rule for retail investment accounts in an effort to catch up with the
Labor Department's fiduciary rule for retirement accounts; simply enforcing existing rules is not a silver bullet.
"It's very difficult to draw the line between sales and advice," Phyllis Borzi, former assistant secretary of Labor and architect of the DOL rule, said at a TD Ameritrade Institutional conference earlier this month in Washington. "The SEC has not aggressively monitored and enforced its own rules. We just couldn't let consumer confusion continue."
A new regulation
Enough water has gone under the bridge that the SEC would have to write a new regulation in order to demarcate what "solely incidental" means, according to SEC investor advocate Rick Fleming.
"It's happened for so long now, people in the [SEC] general counsel's office would say you really need a rule-making to be fair in fixing it," he said at the TDAI conference.
Nonetheless, Mr. Fleming said parsing where sales end and advice begins is "a potential path forward," as the SEC works on advice standards.
Brokers are in a difficult position because it's easy to move from giving clients research reports on emerging markets exchange-traded funds to making recommendations on what they should do generally with their investments.
The journey from "incidental" to "personalized" can be short, according to Blaine Aikin, executive chairman of Fi360, a fiduciary training and accreditation firm.
(More: The Fiduciary Journey)
"I don't know how you put that genie back in the bottle," Mr. Aikin said. "To back that down and define what incidental advice means is very difficult."
Carving out a seller's exception in a fiduciary rule is also a challenge. Ms. Borzi tried to do that without success when drafting the DOL rule.
"It was almost impossible to draw a line that was enforceable," she said.
Perhaps the answer is adviser-title reform, something that has been touted by the Investment Adviser Association as well as Republican SEC member Michael Piwowar.
"We urge the commission to address this source of investor confusion by prohibiting firms or individuals from holding themselves out as trusted advisers without being subject to either the [Investment] Advisers Act fiduciary principles or a new, equally stringent best- interest standard under the [Securities and] Exchange Act," the IAA wrote in an Aug. 31 comment letter to the SEC.
