Going Beyond the Sound Bite – Fiduciary is Complicated, so How Do You Keep it Simple?

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Going Beyond the Sound Bite – Fiduciary is Complicated, so How Do You Keep it Simple?

Jill Hoffman is FSR’s Vice President of Government Affairs for Investment Management

For years, efforts have been afoot to redefine what it means to be a fiduciary when providing financial advice to clients.  The question is straightforward, “Should your financial professional act in your best interest?”  The answer is, “Yes. Of course, they should.”

Anyone worth their salt in the financial services industry has to do what’s right for their clients, or they won’t be in business for very long.  The trouble is, when you start to use words like “fiduciary duty” and then insert federal and state regulators with different rules governing investment and retirement products and the professionals that serve clients saving for retirement, that very straightforward question, as with most things in regulation, gets, well, complicated

But I don’t understand, what is so complicated about ensuring that the advice is in the investor’s best interest?  That’s central to protecting investors, right? 

“Of course.” The problem is that financial professionals selling retirement products and services are held to an ERISA fiduciary standard that is different than the fiduciary standard registered investment advisers are held to under securities law.  Further, many argue that the registered investment advisers’ duty should be harmonized with the legal suitability duty to which broker-dealers are bound.




Yep, that’s another standard. Some say it’s a lesser standard. I suppose you can argue that requiring broker-dealers who sell your stocks, bonds, and variable insurance products do what’s “best” for you, but what is “best”? Is it the cheapest investment product? The one with the most risk protection? The most aggressive investment for your risk profile?

Risk profile?

Yes, a risk profile. It’s required by FINRA which regulates broker-dealers and falls under the oversight of the Securities and Exchange Commission (SEC). It means that a broker-dealer and their representatives (those who actually sell you a security) must take the information you give them (your financial goals, investment experience, risk tolerance, and so forth) and use it to determine your risk tolerance profile. They have to assess your tax status, timeline horizon until retirement, liquidity needs, and other key details needed to get a complete profile of you as the customer. Anything that broker-dealer sells you must be appropriate for your risk profile. That is called suitability. It’s actually pretty rigorous. Just ask anyone who sells securities to talk about all they have to do to be compliant. The sheer amount of paperwork and checks and double checks will make your head spin.

So then what is a Fiduciary Duty?

Good question. There isn’t one definition. Securities law says that registered investment advisers must adhere to this “best interest” duty when providing advice and managing your assets on a discretionary basis (they make the decisions for you), and they have to disclose their material conflicts of interest to you.  Under securities law, the investment adviser can continue to work with you even if it has a material conflict of interest, if that conflict has been disclosed to you and you—as the customer—make a determination that you want to continue your relationship with that adviser.   ERISA, which is the law governing retirement accounts, is very different. It basically says the same thing, but the way it is structured, those providing advice are bound by ERISA’s “thou shall not” provisions (such as thou shall not get paid for your services) unless they provide a specific exemption that allows for that activity. That’s called a Prohibited Transaction Exemption (PTE).  Under ERISA, you cannot continue to work with a financial professional even if the disclosed material conflict is not important to you—the financial professional must have a PTE to work with you.

Prohibited Transaction Exemption?

Yep.   It’s just DoL and ERISA’s funny way to name basic financial guidance and payment structures to ensure your advisor can work with you and receive compensation that would otherwise be prohibited under ERISA.  The PTEs are intended to ensure that the financial professional’s compensation is “reasonable.”

I’m Confused, so then what is a Fiduciary?

The answer is that being a fiduciary and acting in a client’s best interest isn’t as straight forward as one would like. Different agencies have different jurisdictions over different products and practices, and what it means to be a fiduciary has not been harmonized between agencies and regulators on the federal and state levels.

The Financial Services Roundtable and many other financial services industry trade associations support efforts to harmonize the standard so that anyone providing investment or retirement advice to individual investors is held to the same standard, but there is little political will to do that.

So What Does That Mean for Investors?

It means that depending on which services you need from financial professionals, they will adhere to a different set of rules. Note that I didn’t say a bad set of rules, just different.  The Department of Labor is the most active in trying to change the rules, but its efforts will only apply to advice about retirement accounts, such as your 401(k) and your IRA.

That’s Good, Right?

It’s good if the rules will work. But they won’t. The Department of Labor’s proposal completely overhauls existing rules and PTEs with hundreds of pages of complex requirements and dense legalese. If implemented, some of the new rules will conflict directly with existing insurance and securities law. Compliance will be impossible, meaning customers will lose their preferred advisor.

Why are They Doing This?

The goal is noble; they want to ensure investors are protected and get advice that’s in their best interest.

So Who Opposes That?

No one, really. The issue is the substance of the rule, not the goal of the rule.  The financial services industry broadly supports coordinated efforts to create a single best interest standard.

So How Do You Fix the Substance?

In a perfect world, updates to the law would be initiated by the predominant regulator, the SEC, and the DoL would make its changes work with securities and insurance law. But the DoL isn’t happy that the SEC is still evaluating how to update the law according to the parameters outlined in the Dodd-Frank Wall Street Reform Act, so it is moving ahead on its own.  As a result, the Financial Services Roundtable has proposed a SIMPLE PTE as a better way to accomplish the DoL’s policy goal.

What’s the SIMPLE PTE?

FSR’s Simple Investment Management Principles and Expectations (SIMPLE) PTE, which is outlined in FSR’s comment letter to the DoL, requires financial professionals and financial institutions to put their customers’ interests first.  It requires financial professionals and financial institutions to provide their customers with clear and concise disclosures in “plain English,” and to receive reasonable compensation for their services. It also ensures regulators can hold them accountable if they violate the rule.

That’s Great, but if the Securities Regulators Don’t Make Changes Too, Will this Create More Confusion?

No.  The SIMPLE PTE is a way to accomplish both the DoL’s goal to update ERISA to better protect retirement savers, and would easily fit with any broader effort to establish a harmonized fiduciary standard for all investment and retirement savings products.

Where Can I Learn More about how the SIMPLE PTE Will Work for Savers?

FSR’s SIMPLE PTE and the reasons why it will work better for investors and savers can be found at www.protectourfinancialfuture.com.

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