Retail investors should be able to rely on the financial guidance they receive, regardless of whether it’s from an investment adviser or a broker, according to the SEC official leading the agency’s study of fiduciary duty.
“They want help,” Jennifer McHugh, a senior adviser to Securities and Exchange Commission Chairman Mary Schapiro, said at the annual conference of the North American Securities Administrators Association Inc. on Sunday. “Retail investors expect that advice is given in their best interest. We need to think about how to make the standard meet their reasonable expectations.”
Ms. McHugh is in charge of the SEC group that is putting together a report for Congress on the differences in oversight of investment advisers and broker-dealers and whether regulatory gaps exist.
The study, due in January, is mandated by the Dodd-Frank financial-regulatory-reform legislation that was signed into law in July. During the 30-day public comment period on the standard of care requirements, the agency received 2,700 comments on the controversial topic, in addition to hundreds of form letters.
The Dodd-Frank law gives the SEC the option of setting a universal standard of care for anyone providing personalized investment advice to retail clients.
Currently, investment advisers must adhere to a fiduciary duty, which requires that they act in the best interest of their clients and disclose all material conflicts of interest. Broker-dealers operate under a suitability rule in which they are required to ensure that investments a client’s needs, timeline and risk appetite.
Groups representing brokers have expressed concern that a universal fiduciary duty would undermine the B-D business model, which is based on sales commissions, raising their costs and denying affordable investment help to middle-income clients. B-D advocates also assert that their industry is already subject to tough and consistent regulation by
Financial Industry Regulatory Authority Inc., which examines their operations more often than the SEC reviews investment advisers.
Marc Menchel, executive vice president and general counsel at Finra, told the NASAA conference that there are elements of a fiduciary duty within the suitability rules that the self-regulatory agency administers in overseeing broker-dealers.
“It exists and should be augmented,” Mr. Menchel said. “The question is, how much further should it go?”
During the SEC study of the issue, the meaning of the term “in the best interest” of investors has to be parsed, Mr. Menchel said.
“The ‘best’ is a very tough standard,” he said. “What is best?”
Supporters of a universal fiduciary standard argue that such a standard offers greater protection for the public. They say that investors assume that financial advisers are required to look out for their clients’ best interests. They also point out that, over the years, broker-dealers, who sell proprietary products, increasingly have marketed themselves as financial advisers. That, in turn, has blurred the distinction between B-Ds and investment advisers.
Nevertheless, B-D associations worry that a universal fiduciary duty would limit broker-dealers’ ability to charge commissions and sell proprietary products — although Dodd-Frank includes provisions stating that neither activity is necessarily a fiduciary breach. Under the law, broker-dealers would not have a continuing-care obligation after a sale.
Ms. McHugh said that investors aren’t put off by the fact that a broker offers investment only products from his or her firm. What they need is a straightforward acknowledgement of the arrangement, she said.
“Retail investors just want to know what the game is,” Ms. McHugh said. “And [then] they can make their own decisions.”
