Unlocking Real Value Blog

My Two Cents on the Fiduciary Standard

Since the release of the SECs report on the Fiduciary Standard last weekend, it has been the talk of the industry. I therefore feel compelled to add my two cents on the issue, especially since it will be one of the most discussed and debated issues of the year (and perhaps next year).

But before I speak to that issue, the SEC also released its report on the need for enhanced examination and enforcement resources for investment advisors; both studies were mandated by the Dodd-Frank Act. This study has gotten far less press, but its implication are just as important. To quote from the results “State regulators may not have adequate resources to continue to assume increased regulatory responsibilities, and investor protection could be compromised if such resources are lacking.”

The study made no final recommendations, but my concern is that regardless of how the fiduciary standard issue finally concludes, lack of effective enforcement will significantly decrease its effectiveness. Especially in today’s atmosphere of governmental budget cuts, don’t overlook the importance of how any eventual legislation is supposed to be enforced. Given the spotty recent records of the regulatory agencies, this study should be garnering a lot more the public discussion.

Now, on to the fiduciary standard. To borrow from another commentator, if this were a baseball game, we would probably be in the third inning – this issue will not be settled for a long time. At issue is if brokers should be held to the fiduciary standard that investment advisors are held to today. Under the recommendation, anyone providing personalized investment advice to retail customers would have to adhere to the fiduciary standard.

Part of the rationale given for the recommendation is that client’s do not understand that there are differences in the standards in place today. The SEC argues that harmonizing the regulation of advice providers would increase investor protection (although no specifics are given). The new standard would require that advisors show that any recommendations they make is defensible and that the paperwork is in place to ensure that investors understand exactly the service they are expecting.

A summary of my two cents:

– This issue will not be decided for a long time, and as the publicity continues the arguments are probably going to confuse investors more than anything;

– Instituting a fiduciary standard that is not enforced will not protect investors;

– Just because investment advisors today are held to this standard does not mean that all investors are protected; and just because brokers are not help to this standard does not mean that investors are being harmed;

– The burden continue to fall on the advice giver (broker or investment advisor) to explain how they act in the client’s best interest – to describe their process and how they hold themselves to a fiduciary standard (regardless of whether anyone else does).

At the end of the day, successful advice givers will be able to articulate their value-added proposition and succeed. The rest of this seems to me just to be a lot of noise……..

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