On Wednesday, the Securities and Exchange Commission unveiled its long-awaited proposal for new rules around a “best interest” standard for financial advisors. The proposed rules fall short of requiring financial advisors to uphold a true fiduciary duty (i.e., to unambiguously put their clients’ best interests first). As such, they prolong the status quo: a business model riddled with conflicts of interest that often enrich the industry at the expense of the client.
Establishing a fiduciary duty for financial advisors should not be this complicated. While it’s commendable that the SEC is making an effort to address this problem, a 1,000-page proposal is a disheartening outcome. As the SEC Commissioner Michael Piwowar pointed out, if it takes more than 1,000 pages to explain the rules, they might not be clearing up much of the confusion on this front.
And while the proposal says that brokers will “act in the best interest of that customer at the time the recommendation is made, without placing the financial or other interest of the (firm) ahead of the interest of the retail customer,” nowhere in those 1,000 pages does it actually define what is meant by “best interest.”
Fiduciary duty is not a vague term; its meaning is long-established. Either you’re putting the client’s best interests first, or you are not. In the medical community the fiduciary standard is the Hippocratic Oath that can be summed up in three words—do no harm. A doctor doesn’t promise to give you the best possible treatment except when a drug company is paying him a commission.
Whether you’re a doctor, a lawyer or a financial advisor, it should be no more complicated than that. The waters only get muddied when special interest groups are able to introduce exceptions, loopholes and ambiguity that serve their own commercial purposes. Put another way: Creating ambiguity is just an excuse to avoid putting the client’s interest first.
It’s frustrating to see that after more than a decade of talking about the need for a fiduciary standard to protect investors that this is the best the SEC could come up with. The onus will still be on the client to figure out what the newly mandated four-page disclosure document actually discloses.
While it’s great to see the SEC finally doing something, my expectations are modest. We still have a long way to go before a true fiduciary standard becomes the norm in financial services. But while regulators and the industry continue their circular debate on what being a fiduciary means, independent advisors who put their clients first are solving the problem on their own without any government standard.
And that gives me hope.
Elliot Weissbluth is the founder and CEO of HighTower, a national, advisor-owned financial services company serving high-net-worth and institutional clients.
