Fiduciary Rule For Brokers? Not Dead Yet Say Advisors Hot

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Contrary to published reports the fiduciary rule for brokers isn’t dead yet.

Or at least that’s what a handful of advisers who hold themselves out to be fiduciaries are saying, or at least hoping.

“It would be a mistake to interpret a period of quiet or pause in Securities and Exchange (SEC) public action on this issue as if 'it's over,'” says Kathleen M. McBride, AIFA, an accredited investment fiduciary analyst and founder of FiduciaryPath. “Progress has not stopped on the fiduciary standard -- this very crucial standard of care for investors.  It may be taking longer for many reasons, including the need to look at potential rules and principles holistically and the need to get any rulemaking right when it does happen.“

Not all share that point of view. Barbara Roper, the Consumer Federation of America's director of investor protection, was quoted in published reports saying the SEC’s fiduciary rule making "appears to be stalled with little to no signs that the agency appears [likely] to go forward with the issue that [Chairman Mary] Schapiro once said was a priority.”

Also check out this Bloomberg report on the stall rule making efforts.

If it is dead, that’s bad news for investors says one advisor. “If this is indeed the case, the big wirehouse lobbyists have won and investors have lost,” says Chad Griffeth, AIF, co-founder of BeManaged. “If investors seek advice, they should be able to trust that it is in their best interest, not the broker’s. Most investors simply assume this is true. I have no issue with sales people selling products, but when investors assume brokers are acting in their best interests, there is an issue of consumer's expectations vs. reality.”

For what it’s worth, experts say the Labor Department (DOL) is likely to continue moving ahead with its fiduciary proposal. “I think if there's a change in administration, then we'll see action on the part of both the DOL and, possibly, the SEC,” says Chris Carosa, the chief contributing editor of Fiduciary News. “This is what we saw in the waning hours of the Bush administration from its DOL.”

The SEC Is Working On It?

According to McBride, the SEC has been working on a cost-and-benefits analysis, which, interestingly, some voices say may not be necessary. See, for instance, this report from Better Markets. And read also this report from Better Markets. And read this Reuters report highlighting recent efforts by fiduciary activists.

“I don't think this is over,” says McBride. “And, investors are voting with their feet and moving to where they can work with a fiduciary, someone who is willing to say, in writing, that they will align their interests with their client, the investor, period.”

Currently, McBride says that's the RIA, though not the dual registration, space. “That means, or includes, not wearing two hats, something that Ron Rhoades calls potentially fraudulent,” says McBride.  “While many investors still don't understand the differences between brokers and investment advisors, they are starting to ask the questions that will give them answers that will drive them to an advisor who will be their fiduciary. So in the event the SEC cannot or does not act, perhaps this will be determined by the investor, and then the market for advice.”

To be sure, plenty of RIAs want the fiduciary rule to be applied to brokerage firms.

“The largest wealth management companies talk a good game about placing clients' interests first,” says Aaron Skloff, AIF, CFA, MBA, chief executive officer of Skloff Financial Group. “But, they clearly do not want to be legally obligated to place their clients' interests before their companies’ interests or any of its stakeholders.  This is evidenced by their refusal to accept 100% fiduciary duty.”

Of course this is understandable to Skloff and others.  “Many of the largest wealth and investment management companies are publicly traded companies owned by shareholders,” Skloff says. “And, like all publicly traded companies, they must act in the best interest of their shareholders – not their clients.”

By contrast, Skloff says privately owned RIAs are obligated by law to place to accept 100% fiduciary duty, placing their clients’ interests before any stakeholder or any other party – period.

And for what it’s worth, McBride points to research conducted by Ron Rhoades, the chair Alfred State’s Financial Planning Program and president of ScholarFi, which shows what the precedent was for brokers who provided advice to investors earlier, from the late 1930s and 1940s until relatively recently.  “Rhoades’ research showed that the fiduciary standard was the standard for advice no matter what your registration, title or the type of account,” says McBride. “If you, the broker or advisor, held yourself out as a trusted advisor, by advertising or persuasion or action, you were deemed by regulators to be a fiduciary. Rhoades asks the basic question: Does that make new regulation under Dodd-Frank even necessary, given that precedent of holding any intermediary to the stringent fiduciary standard when they purported to be a trusted advisor?”

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