The Fiduciary Standard – Peace of Mind for American Investors

Wednesday, November 17th, 2010 by Cass Chappell, CFP®

“We must hold ourselves strictly accountable. We must provide the people with a vision of the future.” – Barbara Jordan

One part of the recent Dodd-Frank Bill (a.k.a. Financial Regulation) required the SEC to conduct a 6 month study into the standards of care which broker-dealers and investment advisors apply to their customers, and report to Congress on the results in January of 2011.

After the findings are presented, the SEC is expected, but not required, to set rules to provide that “the standard of conduct for all broker-dealers and investment advisors, when providing personalized investment advice, shall be to act in the best interest of the customer without regard to the financial or other interest of the broker-dealer or advisor providing the advice.”

As I’ve stated before, this is a GREAT recommendation and one that will certainly only help to protect investors who are seeking financial and investment advice from professionals. Why should investors expect anything less than working with an advisor that has their best interests in mind?

As it stands now, registered investment advisors (RIAs) and advisors regulated by the Securities and Exchange Commission (SEC) are bound, by the Investment Advisers Act of 1940, to a fiduciary standard that boils down to a duty to disclose “all material facts” and “employ reasonable care to avoid misleading” clients.

Stock brokers and registered representatives (RR’s) are regulated by a separate entity, FINRA, and must conform to the Securities Act of 1933 and the Securities Exchange Act of 1934.  They are expected to make recommendations based on the “suitability” to the buyer.  This would include cost considerations and the buyer’s experience with the securities in question.

Let me be VERY clear.  Just because someone is an RR and not an RIA does not automatically make that advisor dishonest.  Likewise, being an RIA doesn’t guarantee that they are a saint.  Remember, Bernie Madoff was an RIA.  At the end of the day, each category has its share of good and bad professionals.  This potential extension of the fiduciary standard should be exciting for those of us who adhere ourselves to these higher standards, but scary for those who would rather not.

Many advisors (like Charles and I) actually have the ability to act either as  an RIA when we work for fees (fiduciary standard) or as a registered representative in the limited cases where we work for a commission (suitability standard).  We should be bound by the same standard of care in either case, right?  Of course we should!

Interestingly, most Americans are unaware that potentially applying the fiduciary standard to all financial professionals is part of the Financial Regulation bill, nor do they understand that all “financial planners,” “financial advisors,” “financial consultants,” “account executives,” etc, ARE NOT HELD TO THE SAME STANDARD.

But to their defense, why should they know that? When you seek help from a high level professionals, like a physician or a lawyer, shouldn’t you assume that you are receiving care based on your needs, not just having procedures done that will fill up the doctor’s quota?

It’s for this reason that all financial professionals should be held to the same standard.  If we are going to truly help people reach their retirement goals, live better lives and have less stress when it comes to their family’s financial futures, then we need to hold ourselves to the highest of standards. 

The consumer must confidently know that their advisor is supposed to be acting solely in their interest. Only then will we be able to create a level of trust synonymous with that of the family doctor, and not a salesman.

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