A group that promotes investment advice that's in the client's best interest is not waiting for federal regulators to come up with a fiduciary rule for all financial advisers, it's offering an 11-point plan for how to start acting as fiduciaries now.
The Institute for the Fiduciary Standard on Thursday released its
best-practices proposal.
The steps include providing advice that adheres to the fiduciary requirements of the Advisers Act of 1940, being transparent about fees, avoiding conflicts of interest, eschewing commissions and third-party payments, avoiding principal trading and choosing from a range of investment products to meet client needs.
An official at the Securities Industry and Financial Markets Association criticized the list on Friday, saying that the proposal is designed to limit fiduciary status to fee-only advisers and exclude brokers.
But Knut Rostad, president of the Institute for the Fiduciary Standard, said the organization is outlining actions that all financial advisers, including brokers, can take to be fiduciaries. The list of steps is meant to combat what he called a “made in Washington” definition of fiduciary that accommodates conflicted sales practices.
“This new view is profoundly anti-investor and, quite frankly, deeply troubling,” Mr. Rostad said at a media briefing at the TD Ameritrade Inc. annual advisers conference in San Diego on Thursday. “Fiduciary advisers need to lead a resurgence of fiduciary principles, not by lobbying Washington but by speaking clearly and plainly in the public square.”
But SIFMA, which represents a wide swath of the financial services industry, countered that Mr. Rostad is trying to fit all investment advice under the 1940 law that currently governs only investment advisers.
“It seems clear that the 'Institute for Fee-only Advisers' does not want brokers to achieve fiduciary status,” said Kevin Carroll, SIFMA managing director and associate general counsel. “The message, essentially, is you'll never be good enough to join our fiduciary club. If your business model doesn't look like ours and you're not compensated like us, you'll never be a fiduciary.”
In his briefing Thursday, Mr. Rostad said that brokers can qualify as fiduciaries by following the institute's best practices.
“We hope brokers look at them seriously,” he said. “They were crafted with an explicit objective of being open to having brokers meet the practices … without lowering the standards.”
The institute's proposal will be open for public comment until March 9. Mr. Rostad expects the organization's board to give final approval over the summer. The group also is developing a verification process to certify that advisers are following the best practices.
Dodd-Frank gave the Securities and Exchange Commission the authority to promulgate a rule that would require all financial advisers to act in the best interests of their clients.
Currently, investment advisers meet a fiduciary standard while brokers adhere to a suitability rule that allows them to sell high-priced investment products as long as they meet a client's investment needs.
The SEC has not advanced a fiduciary-duty proposal. The Department of Labor is poised to repropose its own fiduciary-duty rule that would increase the number of financial advisers who must act in a client's best interest when advising on retirement plans, including brokers who sell individual retirement accounts.
In 2011, SIFMA filed a letter with the SEC outlining a “fiduciary framework” that could guide the agency in developing a uniform fiduciary standard.
The organization argues that extending the 1940 Act to brokers is not feasible because of the unique ways that brokers and investment advisers operate. For instance, Mr. Carroll said, brokers give episodic advice while advisers provide continuous advice, broker advice is non-discretionary rather than discretionary, and brokers manage conflicts while advisers must eliminate them.
“There's room for both brokers and advisers to serve their clients as fiduciaries,” Mr. Carroll said. “Their business models are different. The fiduciary standard can adapt to those differences.”
Mr. Rostad counters that the SIFMA approach would water down the fiduciary standard.
“That's a very different world, what SIFMA is proposing, than what is reflected in [the institute's] practices,” he said.
The institute will develop a way to confirm that advisers are following the best practices.
“The verification component is critical to these best practices being widely adopted by the industry because we think at that point there's also a direct benefit to consumers,” said Brian Hamburger, chief executive of MarketCounsel, who is working with the institute. “They can go out and shop for an adviser who subscribes to these best practices.”
The practices might become the foundation for a credential offered by the institute.
“That is clearly one of the options open to us,” Mr. Rostad said.
