The Investment Advisers Act of 1940 (US), created a fiduciary requirement for any “advisor” to give advice that is in the best interest of the client. Over many decades of case law, common law has defined the fiduciary standard to include:
1. a duty to act in the best interests of the client;
(so no advising clients into higher risk products to make higher fees; no keeping client capital fully invested regardless of price risk because you are paid more when they stay fully risk exposed)
2. a duty to not make secret profits out of their agency relationship for the client;
(so no hidden commissions, IPO fees, higher fees on proprietary products, no rehypothecation, or third party kick backs)
3. a duty to inform the client of any conflicts of interest.
(like reminding them that the adviser makes more if the client agrees to allocate more of their capital to equities versus bonds or cash)
From the client’s perspective one would think that these requirements are rather basic, obvious expectations of any person who holds themselves out as a professional “adviser” hired to provide something as important as advice and planning. (Think of standards expected of one’s lawyer, doctor or estate executor.) But through expensive and relentless lobbying, the broker/dealer/mutual fund/insurance/investment sales community have so far managed to exclude themselves from fiduciary standards.
Following the conflict cesspool exposed by the 2008 financial crisis, The Dodd-Frank Act of 2010 called on regulators to establish protections for brokerage clients that are “at least as high” as the Investment Advisor Act of 1940 for Registered Investment Advisers. Naturally this led to outrage in the financial sales crew and a redoubling of resistance and lobbying, calling on the SEC to water down the long standing standard of care considered “fidicuary”. Their antics have managed to stall any implementation of higher standards, and the new SEC board is now mulling the proposal that they revise the very meaning of advice so as to water down any fiduciary duties that may govern those ‘advising’ on financial products.
Concurrently, as workers remain under-saved, battered and beaten from years of bad financial advice and abuse, the Department of Labor is preparing to re-propose “modernizing” [read watering down] what fiduciary means under ERISA (The Employee Retirement Savings Act).
The Institute for the Fiduciary Standard this week announced its Fiduciary September initiatives, stressing the ‘enormous responsibility’ on the Securities & Exchange Commission (SEC) as it considers revising the meaning of [retail] ‘advice’ in federal securities law.” This month has been dubed “Fiduciary September”.
For their part the Securities Industry and Financial Markets Association (SIFMA) insist that their members do put their clients best interests first, but that if they are required to do so by law this will lead to untold damages being paid to clients and resulting product inaccessibility that will necessarily lead to many clients being unable to attract advisers.
Hmmmmmm. You have to think…with non-fiduciary financial advisers like these, really, who needs enemies?