THE FIDUCIARY STANDARD
The Fiduciary Best Interest Standard is Dying at the SEC – Fee-Only Fiduciary Advisers Can Act to Preserve it
By Knut Rostad
The fiduciary standard as understood in law for decades no longer exists. Most Main Street investors get a “suitability plus” standard at best.
Since 2009, when the Obama administration recommended brokers act as fiduciaries, the SEC has diminished fiduciary advice. SEC Chair Mary Schapiro then proclaimed that brokers and advisers are, “Merging to the point of, in some cases, relative indistinguishability. This is certainly evident from the retail investor’s perspective.”1 This remark should be viewed as starting the decimation of fiduciary best interest advice.
The Longstanding Legal Meaning of Advice and Brokerage Sales
The Investment Adviser Act of 1940 (IAA) put investment advice into federal law. The 1963 Supreme Court capital gains decision stated the IAA, “reflects a congressional recognition ‘of the delicate fiduciary nature of an investment advisory relationship.’” This meant:
“... Investment advisers could not completely perform their basic function—furnishing to clients on a personal basis competent, unbiased, and continuous advice regarding the sound management of their investments—unless all conflicts of interest between the investment counsel and the client were removed.”2
The court further stated the essential role of Fee-Only compensation. “Remuneration … would consist solely of definite, professional fees fully disclosed in advance.” There is no question that NAPFA’s 1982 origins reflect the IAA thinking noted by the Supreme Court.
Securities attorney Michael Koffler reminds us of what broker-dealers do: “Broker-dealers act for their own account or as agents of the issuer, principal under-writer, syndicate members or wholesaler … and are contractually obligated … to distribute the very securities that they provide advice and recommendations on to investors.”3
The adviser/broker difference is stark. A fiduciary adviser is legally obliged to put clients’ interests first and seek to avoid conflicts. In contrast, sales brokers are allowed to receive opaque commissions and third-party payments and earn their compensation from conflicts.
Until recently, the SEC affirmed these differences and warned advisers, “As a fiduciary, you also must seek to avoid conflicts of interest with your clients, and, at a minimum, make full disclosure of all material conflicts…” and “You should not engage in any activity in conflict with the interest of any client …”
A veteran SEC staff member added: “An adviser must act solely for the benefit of its client and must not place itself in a position of conflict with its client. An exception is made, (emphasis added) however, when the adviser makes full disclosure to its client and obtains the client’s informed consent.”
In 2012, Carlo V. di Florio, director, SEC Office of Compliance Inspections and Examinations, explained why conflicts of interest need to be avoided, noting
“Conflicts of interest can be thought of as the viruses that threaten the organization’s well-being. … even the simplest virus is a mortal threat to the body.”4
The New Meaning of “Advice” at the SEC
This clarity dominated at the SEC for five decades. Yet by 2014, the Supreme Court opinion was forgotten and new thinking emerged. This new thinking proclaimed conflicts are okay and the failure to avoid conflicts is no longer a failure to act in the best interest of the client.
At a TD Ameritrade conference in 2014, I heard SEC Commissioner Piwovar tell the audience there is just a 2–3% difference between the suitability standard and a new standard from Dodd-Frank legislation. The audience looked stunned.
On February 26, 2015, Julie M. Riewe, co-chief, Asset Management Unit (AMU) SEC stated, "... Only through complete and timely disclosure can advisers, as fiduciaries, discharge their obligation to put their clients' and investors' interests ahead of their own." This statement was also stunning.
2019 SEC Rulemaking on “Best Interest” and Fiduciary
In 2019, SEC’s Regulation Best Interest (Reg BI) embedded these anti-fiduciary principles in the rule. Advisers and brokers were branded alike offering “best interest” advice.
Some saw Reg BI correctly and criticized it for failing to raise standards. Consumer Federation and PIABA said so.5 Research by NASAA, the state securities regulators, revealed Reg BI failures in 2023. “Firms are still relying heavily on suitability policies and strategies that predated Reg BI. Efforts to address the standard of care concepts established by Reg BI remain perfunctory.”6
The SEC’s Form CRS states brokers and advisers are held to the same standard: “When we provide you with a recommendation as your broker-dealer or act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours.”
In 2022, the SEC acknowledged the demise of fiduciary advice. Staff warned RIAs against disclosing their fiduciary status, because doing so may be “extraneous” or “misleading.” “… The staff cautions against an investment adviser using the terms ‘fiduciary’ or ‘fiduciary duty’ ….” (Posted March 30, 2022)7
In Summary
After many years of unabated misbranding, the industry deems brokers to be just like advisers. Misleading broker-dealer messaging muddled clearly different standards of practices, costs, and services. Meaningful transparency has become a late-night TV joke.
Fiduciary best interest principles are degraded; duties of loyalty and care are interpreted to be meaningless. Adviser and broker differences have been covered up. NASAA research suggests the new SEC broker-dealer “best interest” standard is a suitability standard in costume. No surprise the SEC warns RIAs against stating they are fiduciaries on Form CRS.
Many Fee-Only RIAs seem to believe this doesn’t matter. We hear, “my clients know what we do. This is enough. Besides, RIAs can’t outspend broker-dealers.” Respectfully, no, this is not enough and, yes, fighting in Washington is a “loser’s game.” Fighting for core principles in the marketplace of ideas is a winner’s game. It is also an American story. What to do?
What Can Fee-Only Planners Do?
Fee-Only RIA firms can strengthen fiduciary by invigorating their own fiduciary brand and supporting a national campaign. Only fiduciary leaders, not regulators, can do what is required to secure a higher standard. Here are three steps to start:
First, review your fiduciary messaging. Assess your fiduciary aptitude and messages. Identify ways to strengthen your fiduciary brand. Start with a firm meeting. Review the purpose of this meeting and how you communicate fiduciary values and practices. The deliverable is a “to do” list and guidance for crafting communications.
Second, craft messages. Forget legalese. Use plain language and images for client conversations and materials and your website. Explain fiduciary advice and why it matters. Explain facts clearly. Do not shy away from contrasting what fiduciaries do with what salespeople do.
The Fiduciary Institute’s Fiduciary Common Sense document offers one example.8 Finally, of course incorporate your fiduciary messages in social media.
Third, advocate. NAPFA, the Fiduciary Institute and other Fee-Only groups should band together to educate consumers in a social and traditional media campaign on what it means to be a fiduciary. Be creative. The campaign will be newsworthy, drawing attention from journalists, investors, and RIAs alike. NAPFA, a proven leader in advocacy—most recently demonstrated through its support of the Department of Labor’s Fiduciary Rule—and the Institute for the Fiduciary Standard should take the lead in spearheading this initiative.
Bob Veres, the 2024 Frankel Fiduciary Prize honoree, underscores this point. “Spreading the word has been a winning strategy,” he says. “But today I’m not seeing quite the same energy as I did in the past. … This battle will be won in the marketplace and not in the offices of regulators and legislators.”
The fiduciary best interest standard is faltering at the SEC. However, Fee-Only RIA financial planners—not regulators—can revive it. NAPFA founders, first-generation fiduciary planners, led with energy and passion. Today, NAPFA and the Fiduciary Institute members and all Fee-Only planners are demonstrating similar commitment, continuing to advocate for a secure financial future for all Americans.
1 SEC Speech before the New York Financial Writers’ Association Annual Awards Dinner (Chairman Mary L. Schapiro)
2 SECURITIES AND EXCHANGE COMMISSION v.CAPITAL GAINS RESEARCH BUREAU, INC., ET AL
3 https://thefiduciaryinstitute.org/wp-content/uploads/2024/04/Koffler-2009-Six-Degrees-of-Separation-Principles-to-Guide-the-Regulation-of-BDs-and-IAs.pdf
4 http://www.sec.gov/News/Speech/Detail/Speech/1365171491600#.VRBoKI4sq6U
5 Investor Groups Warn SEC’s Reg BI is a Step Backward for Investors · Consumer Federation of America
6 Reg-BI-Phase-II-B-Report-Formatted-8.29.23.pdf (nasaa.org)
7 SEC.gov | Frequently Asked Questions on Form CRS
8 New "Fiduciary Common Sense" guidance helps investors find fiduciary advisors - The Institute for the Fiduciary Standard
Knut Rostad is the founder and president of the Institute for the Fiduciary Standard.
This article was prepared by the author in his personal capacity. The opinions expressed within are his own and do not reflect the view of NAPFA.
image credit: Adobe Stock Images