The Financial Services Institute, a trade group for small independent b/ds, attacked current government proposals to make the fiduciary standard of care a universal one for all financial advisors—not just RIA investment advisors, but b/d financial advisors as well. The group proposed an alternative universal standard, recommended closing regulatory gaps between the two sides of the industry, and suggested that an industry-run, rather than a government-run, regulator would be best for the job.
As it currently stands, the proposed Investor Protection Act would require all brokers, dealers and investment advisors providing advice about securities to retail customers or clients to adhere to the fiduciary standard. In other words, that they act “solely in the interest of the customer or client without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice.”
In a statement, FSI President and CEO Dale E. Brown urged Congress to adopt a different universal standard of care for all advisors—one that echoes the fiduciary standard of care, but is tailored to the financial advisory industry and includes other protections for clients. He also recommended that new legislation focus on closing the examination and enforcement gaps between the two sides of the industry, citing Bernie Madoff’s fraud as an example of the failure of the fiduciary standard to protect investors unless there is effective enforcement.
Applying a fiduciary standard uniformly across the industry “falls short of real protection for middle class retail investors” for a number of reasons, wrote Brown. He called the fiduciary standard “arcane” and “opaque,” said it is subject to a variety of different legal definitions, and that it will “limit middle class investor access to financial advice, products, and services by increasing costs and raising other barriers to entry.”
Brown recommends an alternative universal standard that would do the following:
· Ensure transparent business relationships, effective client disclosures, and efficient low-cost investment solutions and operations;
· Place the interests of clients before the interests of the advisor;
· Avoid material conflicts of interest when possible, and obtain informed consent to act when such conflicts cannot reasonably be avoided; and,
· Provide advice and service with skill, care and diligence based on information known about the client’s investment objectives, risk tolerance, financial situation and needs.
