Unlocking Real Value Blog

Financial Reform Surprise – the “F” Word’s Revenge!

Like many others, I am surprised at the improbable win for the fiduciary standard announced yesterday – although, I think there is still too much uncertainty for anyone on either side to get too excited. What is certain is that the debate around this issue will continue for at least the next six months – if not longer.

The compromise reached in the financial reform bill almost certain to be passed next week is that the SEC will conduct a six-month study and have the power to decide at that point whether or not broker-dealers will be held to the same fiduciary standards under The Investment Advisor Act of 1940 as investment advisors are today. Advisors at broker-dealers are currently held to a less-stringent standard of suitability. Advocates of imposing the fiduciary standard on broker-dealers feel that it offers clients better protection, while the broker-dealer world is concerned over the costs of implementing and overseeing such a far-reaching change.

From an advisors point of view – the issue should be purely about semantics; I have always argued that advisors should hold themselves to the highest of standards regardless of where they work. It just makes good sense.

The ultimate outcome is far from certain, and there are some important carve-outs in the proposed legislation. For broker-dealers, the standard would only cover retail clients, not institutional clients; it also does not call for an on-going standard, of particular importance to discount brokers who offer do not have long-term relationships with clients (once intial advice is given).

Most importantly, however, is that the SEC does not have to act after the study; and given the SEC’s track record, it could very well be that this is a short-lived victory for those in favor of extending the standard to the broker-dealer world. Industry lobbyists are sure to be very busy over the next six months – so while even though many of us were surprised that the issue is living on at this point, the outcome is far from certain.

Keep watching!

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