Are advisors any closer to a fiduciary duty?

Posted by admin on January 25, 2011 in Investment Information

In the aftermath of the credit crisis, there was a movement to regulate all investment advisors and brokers under a standard of care known as a fiduciary duty. A fiduciary duty is the highest standard of care in law requiring the fiduciary (the advisor or broker in this case) to exercise a high degree of loyalty, not to put his own personal interests before the duty and not to profit from such a relationship unless it is consented to.

Are we any closer to imposing a fiduciary duty on investment advisors and brokers? Sadly, and predictably, the answer is no. The Wall Street Journal reports that a SEC study recommending the imposition a fiduciary duty on investment advisors and brokers is opposed by several members of the commission as lacking sufficient evidence the duty is required.

The objection is grounded in the belief that a move to such a standard prematurely would run the risk of “… restricting retail investors’ access to affordable personalized investment advice and the range of products and services they currently enjoy…” (…and here one thought the multitude of products, some laden with unreasonably high fees, was the true problem…)

There is a rather funny passage in the article stating: “Brokers recently embraced the idea of being subject to a fiduciary duty, but don’t want a standard that upsets the way they do business.” The very reason why we are having this debate is because of the way some brokers do business.

Most likely lobbying money from the financial industry will water down any regulatory measures by the SEC. Brokers and advisors may end up adhering to a fiduciary duty but with enough exemptions and loop-holes that it really is not truly a fiduciary duty.

In Canada, the securities regulatory lawyers cannot agree whether a fiduciary duty should be imposed statutorily or continue to be imposed case-by-case in litigation. The issue with the current regime of imposing a fiduciary duty via lawsuit is that it is generally one-off and there are access to justice issues- in the worst case scenario, an investor has no assets in which to pursue justice against their advisor. What good is the duty if the investor cannot afford their day in Court? Of course, there is the other issue of having to deal with multiple securities regulators in Canada versus just one in the United States.

Underlying the fiduciary duty debate is the Byzantine regulatory system currently in place: in the United States, investment advisors and brokers are subject to different regulatory regimes while in Canada mutual fund advisors and brokers have different regulators and sets of rules. Solving this bureaucratic overlap would be a step in right direction.

The morale of the story is always the same. No one will mind your money better than yourself. Regardless of whether you use an advisor or not, be an educated customer.

3 Comments on Are advisors any closer to a fiduciary duty?

By tom venner on January 25, 2011 at 10:30 pm

As a Fee Based Planner and CFP, I already have a fiduciary duty to my clients. Failure to maintain this duty can result in the loss of my CFP designation. If people want an advisor with a fiduciary duty they should look for a CFP.

By Sancus on January 26, 2011 at 6:47 pm

Good (and important) post.

The only way the investment industry will ever operate with the best interest of the client being the primary objective is to abolish commissions. You cannot (regardless of regulation and/or fiduciary obligations) do the proper due diligence on investments and apply that due diligence properly without all investments paying the advisor the same amount to the advisor (fee-based) and without the client knowing how the advisors guidance has added or detracted value (i.e. performance tracking). The industry will only be a true profession (similar to law and accounting, for example), i.e. clients are paying for intellectual capital, time and results, when the education and experience bar are raised, commissions are abolished, and properly performance reporting are mandatory…IMHO.

Disclaimer: I was a commission based advisor for 5-years and now operate on a fee-basis only (for the last 7-years). Even hourly-fee is not appropriate when investment advice is involved as there is no incentive to maximize returns. I’m also a CFP, but having a CFP does little to encourage proper investment due diligence. Only when commissions are taking out of the equation can client/advisor incentives be aligned. Lastly, if a fee-based advisor is paid differently for different portfolio composition (i.e. different fee for fixed-income or equity etc.) they are not truly fee-based and have a motivation to overweight one asset class over another. Again, IMHO.

By Patrick on January 28, 2011 at 11:25 am

If you’re a fund salesperson claiming to be a “financial adviser”, it seems to me that existing laws on fraud and false advertising ought cover this. If you’re not making your best effort to give the best possible advice, then you’re not acting as an adviser. I like the idea of pinning down the legal definition of “adviser” to require fiduciary duty. If you’re not willing to accept that duty, don’t call yourself an adviser.