Apparently not all advisors and their clients have been following the developments leading to the much anticipated Wall Street reform package Congress released last Friday. In fact, overall advisors and investors are still confused about what the advisors’ fiduciary responsibility is exactly, according to the RIA outsourcing provider, Envestnet study released yesterday.

Surprisingly, four in 10 advisors and clients say, that “to the best of their knowledge, all advisors are currently subject to the same obligation to act in their clients’ best interests.” These four in 10 advisors and clients are of course wrong. Today, registered reps have a "suitability" standard of care; registered investment advisors and their reps' investment advisor representatives (or IARs) "are required to act as fiduciaries. Fiduciaries must always put the client's interest before their own;" it is legally the highest standard of care. Suitability means simply that investments must be suitable, but, for example, not necessarily the cheapest for the client.

The fiduciary quandary is slated to get sorted out six months after the Wall Street Reform bill is signed into law, when the Securities and Exchange Commission completes a study of the regulatory harmonization between brokerages and investment advisors. Congress would allow the SEC to extend the fiduciary standard as defined under the Investment Adviser's Act of 1940 to brokers, without requiring rulemaking or setting a timetable for it. However, according to the Envestnet study, while investors want regulation that would hold all advisors to the same standard of client service, 69 percent also agree that fiduciary responsibility cannot be truly legislated, and instead investors must rely on the advisor’s integrity.

“Fundamentally, investors believe that when it comes to encouraging confidence and trust, what occurs in the interaction between financial advisor and client is far more important than what a regulation says,” Bill Crager, Envestnet president says.

For the most part many advisors say they have always and will continue to act in the best interest of their clients with or without the regulatory fiduciary standards in place. According to one Morgan Stanley Smith Barney veteran, “Advisors find it insulting that there has to be some sort of statute outlining what the moral fiduciary responsibility is. It’s just plain common sense, it’s, ‘How would you handle your grandmother’s money?’ and that is all you have to think about.”

Interestingly, the study found that the confusion over the fiduciary standard doesn’t seem to be harming advisors’ relationships with clients. The research conducted by national polling firm, Mathew Greenwald & Associates, surveyed 504 advisors (171 wirehouse advisors, 167 advisors at regional firms, and 166 registered investment advisors) and 1,023 investors between April 14 and April 30; it found that 87 percent of investors express confidence in their relationship with advisors.

However, despite a high percentage (74 percent) of clients giving their advisor an “A” for integrity, according to the survey, clients gave advisors the lowest scores for “transparency of fees.” Only 40 percent of investors say their advisor explains very clearly how they are compensated and only a little more than half say their advisor explains clearly the fees they pay. Furthermore, advisors themselves admit, they would be disadvantaged if they were more forthcoming with fees, says the report, and about four in 10 agree that until everyone is required to follow the same fiduciary standard, it is a competitive disadvantage to disclose certain expenses, such as hidden commissions. But, RIAs “are more likely to disclose a great deal to their clients about the total costs of doing business with them,” the survey says.

“Most brokers want to do right by their client, but there is a difference between doing right by their client and acting in their best interest,” says Dan Barry, managing director of Government Relations at the Financial Planning Association (FPA). “You might be compensated better and still be acting in their best interest, but it is incumbent on you to disclose that, and say, ‘Here is how I am being compensated. I am still recommending this for you, because I really think it is best for you.’ And then it is up to the client to say they’re okay with that transaction.” Barry says a leveling of the disclosure standards for registered reps and investment advisors would potentially be the outcome of the SEC’s study and iron out the discrepancies between the two designations.