Harmonizing multiple fiduciary standards should be priority

Since the Department of Labor announced the final fiduciary rule on retirement advice, we continue to see considerable discussion and debate about how the rule will impact advisers and the investors they serve. First, let me be clear: I am a strong proponent that advisers providing holistic financial advice must be under a fiduciary standard. There is no logical argument against that. It is good for clients and therefore good for our industry. However, while in concept the expansion of a fiduciary standard is a positive development, the DOL rule creates unnecessary confusion in the marketplace by cementing a three-tiered duty of care that investors and advisers must navigate. Under this structure, advisers and brokers will be subject to different standards during a single conversation with a client, depending on the type of account on which they are advising and the product or service offered. This potential hat-switching is confusing and not beneficial to investors, and creates added uncertainty and risk for the advisers who serve them. To minimize confusion and to ensure investors know when and how their adviser is putting their interests first, regulators should harmonize these different standards as soon as possible. A fiduciary standard is critical for advisers to deliver holistic financial advice. At its core, the fiduciary standard guarantees that the adviser is at all times putting his or her client's interests above their own. As such, this is an essential foundation to ensure advisers provide sound, holistic advice that takes into account the client's long-term goals and priorities. Although on the surface the DOL's expansion of a fiduciary standard seeks to clarify that standard, the rule is problematic in that it makes it harder for investors to know when and under what terms their adviser is acting in their best interests. For instance, when serving any retirement account, all brokers and advisers now will be subject to the heightened DOL fiduciary standard under the Employee Retirement Income Security Act of 1974. Meanwhile, investment advisers serving taxable accounts will remain fiduciaries, but subject to the Security and Exchange Commission's Investment Company Act of 1940 fiduciary standard, which is different from the ERISA standard. Most concerning is the fact that brokers servicing investors who have a taxable account will continue to be governed by the suitability standard, which is much less rigorous in its protection of the investor. In fact, it simply states that brokers must make recommendations that they reasonably believe are suitable for clients. Under the suitability standard advisers are not even required to put the client's interests ahead of their own. This is simply unacceptable. With these multiple standards applying simultaneously, advisers and brokers could be subject to a different duty of care when advising on different types of accounts, even for the same client or household. During a single conversation with a client, for example, an adviser may need to switch his or her duty of care, potentially adopting different fiduciary standards, or moving from a fiduciary to a suitability standard. Even if an adviser discloses these switches, investors are unlikely to understand the substantive differences, and thus won't know when and how their adviser is putting their best interests first, which they very much deserve to know. The different sets of standards advisers are subject to as a result of the DOL rule harkens back to the SEC's famous Merrill Rule, which put brokers in a position of hat-switching that confused both investors and brokers. Under the Merrill Rule, brokers were exempt from the standards of the '40 Act when discussing fee-based services. Average investors, however, often weren't aware of the potential for conflicts of interest created by this exemption, and they rarely understood that their broker was acting under different standards depending on the type of products and services being offered. We fear there will be similar confusion with the DOL rule. In the coming months, we likely will see additional tweaks and changes as the marketplace continues to absorb the DOL rule's ramifications. During that process, regulators should consider ways to harmonize the various standards and duties of care that exist because of the DOL rule. In my view, if regulators do pursue harmonization, they should look to the '40 Act fiduciary standard for direction. As a principles-based framework, the '40 Act is the industry's gold standard and gives advisers the flexibility to adapt to unique circumstances, and best serve the client. I hope the industry and our regulators can come together to harmonize this complex new regulatory reality. Charles Goldman is the president and CEO of AssetMark Inc.