For many years, the battle lines for the fiduciary standard have been drawn. On the one side are those who support the standard, suggesting that commissions and conflicted business models must be eliminated to protect the consumer. On the other hand are those who argue against the standard, suggesting that an option to purchase financial services products compensated by commissions is a choice that consumers can make for themselves and may even represent a less expensive option, especially for the small client. As a result, the battle for the fiduciary standard has been not only about what's best for the consumer, but whether entire business models could be eliminated in the process. In a new turning point, though, a recent letter by many organizations supporting the fiduciary standard have broken new ground in requesting that the SEC move forward with rulemaking by implementing a fiduciary standard that still allows commissions, suggesting that the two are actually compatible and can co-exist. Will this be a new turning point in the advancement of the fiduciary standard - a focus on client-centric fiduciary advice, regardless of compensation model?

The inspiration for today's blog post was a letter submitted last week to the SEC regarding rulemaking on a uniform fiduciary standard to apply to investment advisors and broker-dealers under Section 913 of Dodd-Frank; the letter was supported by a wide range of major organizations, including not only the CFP Board, the FPA, and NAPFA, but also the Investment Adviser Association, Fund Democrazy, AARP, and the Consumer Federation of America. The letter was intended to provide a roadmap about how the SEC can proceed with rulemaking, specifically addressing the points of concern raised last year by SIFMA (the Securities Industry and Financial Markets Association, that has generally opposed the rule and argued for a separate standard to apply to allow for and protect the broker-dealer model). You can see a full copy of the new letter here.

Perhaps most significant in the letter was its statement that "the fiduciary duty is fully consistent with sales-related business practices, including receipt of transaction-based compensation, sale of proprietary products, and sale from a limited menu of products." In other words, the path to fiduciary isn't about requiring the elimination of commissions or a change in compensation and business models, but about overseeing the delivery of personalized investment advice, regardless of compensation, and ensuring that recommendations made subject to the fiduciary duty are not altered by any bias resulting from compensation (and other) conflicts.

Accordingly, the letter suggests that the best path forward is simply to expand the rules framework under the existing Investment Advisers Act (obviously and especially with respect to compensation), supplementing but not rewriting or replacing the entire fiduciary rule and without creating a new, separate, second standard for broker-dealers (as SIFMA has proposed). The letter notes that in reality, even the existing guidance for fiduciary regulation of investment advisers doesn't preclude conflicts of interest, but simply requires full disclosure of material or potential conflicts that cannot be avoided. In fact, the letter emphasizes that many aspects of applying a fiduciary duty to those who also earn commissions already occurs in the context of overseeing dually-registered advisors, and suggests that reasonable and uniform fiduciary guidelines can be built upon the existing Investment Advisers Act framework. However, it is notable that the letter encourages not only full disclosure of conflicts, but an expectation that those conflicts will be managed appropriately or that fiduciary consequences may apply (i.e., conflicts cannot merely be consented away entirely; good advice must also still be rendered).

Overall, the letter seems to offer what some may view as a controversial concession to advance forward the fiduciary duty, and others may view with relief: that fiduciary duty does not require the elimination of commissions or the commission-based models that current exist for many advisors. Notably, the FPA and CFP Board have long advocated for a compensation-neutral fiduciary duty, although it is somewhat surprising that NAPFA in particular signed off, given the organization's roots in not only a focus on fiduciary but a commission-free, fee-only business model to accompany it. Nonetheless, it appears that the olive branch has been extended to move forward on fiduciary; member firms of organizations like SIFMA and NAIFA can keep their commission-based models, as long as the actual advice given - and the associated products that are implemented thereafter - hold up to the scrutiny of a client-centric fiduciary duty. Reading between the lines, the letter also seems to imply that non-fiduciary commissioned salespeople may continue to operate as well, as long as they're not delivering "personalized investment advice" that would subject them to a higher standard.

Personally, I have to admit that I am very encouraged by this new path for advancing the implementation of a fiduciary duty for advisers and brokers. As I have written previously on this blog, the real conflict has never been about suitability vs fiduciary, per se, but about advice vs sales. If you want to give personalized advice, you subject yourself to a fiduciary duty, which can be accomplished regardless of compensation model; if you want to avoid the fiduciary duty, just don't give personalized advice, or hold yourself out as being an advisor (although notably, the letter is silent with respect to rules about how an individual holds themselves out to the public). As the letter notes, the actual receipt of commissions does not itself cause a failure of the fiduciary duty. And as I've noted in the past, contingency fees (comparable to a commission) and compensation for the implementation of advice are already common in the legal and other fiduciary professions, which ultimately evaluate outcomes based on the process used to render the advice and the associated outcome, not the manner in which it was compensated.

At this point, the ball seems to be back in the court of SIFMA and NAIFA - and the SEC, if it chooses to move forward in the face of this perceived compromise. Of course, the devil is in the details, and SIFMA may still push back at the remaining differences between the two sides, most notably that SIFMA advocates for a rules-based approach that provides 'regulatory clarity' while the letter suggests that a principles-based facts-and-circumstances approach is superior to prevent 'gamesmanship' of any fiduciary rules. Whether the two sides can find a compromise on this - or whether the SEC pushes forward anyway - remains to be seen.

But overall, the letter appears to be a major potential turning point in the battle regarding the fiduciary standard, with a remarkably direct acknowledgement that asking for a fiduciary standard is not tantamount to the elimination of commissions, and in fact that the fiduciary duty and commissions can co-exist. The fiduciary standard is about advice, regardless of compensation.

So what do you think? Will this be a step forward for the fiduciary duty, or not? Can fiduciary rules and/or principles be established that can reasonably apply regardless of compensation model? Do you support the latest letter, or object to it?

  • Nancy Flint-Budde

    VERY Encouraging. Thanks so much for posting!

  • Peter McGratty


    You did not speak to the intention behind the letter. Sounds like fiduciaries realize the status quo vis-a-vis the concession allows them to continue to market against the conflict associated with commission based advice.

  • jim schwartz


    As someone who co founded NAFPA, authored defeated Colorado legislation (culprits the CFP Board, and the IAFP and the cpa’s at the time) three times for full and timely disclosure of all compensation – not just method – but estimates up front and actuals quarterly – it is damn overreach to eliminate the choice of commissions

    Regulatory overreach by the liberals and shapiro (ms. Conflict of 1990-2012 herself)…

    the question is full (not fool) and timely disclosure with estimates upfront.

    The industry fought this saying over regulation and how could be estimate upfront.

    Bull. Planners qualify their prospective clients – otherwise the industry was saying a planner can’t walk and chew gum at the same time.

    The hypocritical CPA’s said they were already regulated as CPA’s – true but bull – they weren’t regulated as planners.

    The legislation would be at the functional level of those holding themselves out in the planning advisory capacity- (functional not title regulation) whether a cpa, a druggist, a babysitter or a planner.

    jim schwartz

  • Steve Smith

    I suppose, just by coincidence, the value of financial advice will somehow, occasionally, be related to the kinds and numbers of transactions. But even as a commission based advisor, I would still want to have it as part of my client agreement that in years that I advise my clients not to buy or sell anything, I still get paid for that valuable advice.

    • Michael Kitces

      You can of course design your business model however you wish.

      The point of this is simply that you CAN choose to structure your business model however you wish – as long as the outcomes of the advice can be substantiated as being in the interests of the client under a fiduciary duty.
      – Michael

  • Steve Smith

    I’m trying to imagine if I would go to a doctor, all of whose compensation came from drug companies, device makers, and hospitals, but nevertheless agreed to abide by the hippocratic oath.

    • Michael Kitces

      Ever had a will or trust drafted by an attorney who only gets paid if you decide to implement the will or trust with that attorney? Or hired an attorney for a lawsuit on a contingency fee where the lawyer only gets paid if you win the suit?

  • Steve Smith


    As to the former, I don’t think I would do that. And I would advise clients to compensate an attorney for both conceptualizing as well as drafting an estate plan.

    As to the latter, no, I have never been a plaintiff in a contingency fee case. But in a former life, I was the attorney in many such cases. And I can tell you they are fraught with demanding ethical dilemmas. Malpractice can easily occur if the client is not vigilant. The only reason society tolerates such arrangements is because in most cases litigants could not otherwise obtain representation and would have absolutely no chance of achieving justice. Not sure that’s the case with financial advise.

    • Michael Kitces

      But the point is, we don’t say lawyers aren’t fiduciaries because they have such arrangements.

      We say they face ethical conflicts they must manage, and hold them accountable – including the risk of being disbarred – for failing to meet those standards.

  • Steve Smith

    Actually, I take that back. I was once a Plaintiff in a contingency fee case. The experience was so loathsome, I forgot all about it.

    Actually, on most occasions in which attorneys commit malpractice, in contingent fee cases or otherwise, they are not held accountable. Either because it is so subtle that the clients don’t see it or because the client just has to hire another lawyer to sue for malpractice and ain’t going to go through that again.

  • Phil Billingham

    I am concerned that there seems to be a view that you can be ‘a little bit Fiduciary’. Like being a little bit pregnant or a little bit dead!

    Many parts of the world have moved to ban commission, but allow an ‘Adviser Charging / Client agreed remuneration’ model. Not perfect, but the continuation of Fiduciary Duty is easier to see. We already have a Fiduciary duty in our common law, so this is not new for us. It is also rare for Solicitors to act on contingency fees, so no real pressure there either.

    Personally, I think commissions and contingency fees speak AGAINST there being able to be Fiduciary Duty. So just sell the product, get paid and don’t cloak yourself in a ‘Fiduciary’ aura. I think clients see through that anyway.

  • Steve Smith


    Have you seen anything in connection with the potential “business model neutral” harmonization of fiduciary addressing whether, in a damages claim, evidence of compensation structure or amount might be inadmissible to prove a breach?

    I can imagine a rule of evidence that says:

    “In any action or arbitration to establish a breach of fiduciary duty with regard to the recommendation or sale of an investment product, no evidence as to the source or amount of the advisor’s compensation shall be admissible and the claimant shall not argue that the source or amount of such compensation was a contributing factor in the advisor’s decision to recommend such product.”

    That would certainly put some teeth in a business model neutral definition of fiduciary.

    • Michael Kitces

      I wouldn’t expect an exclusion of compensation as a factor for addressing a potential breach of fiduciary duty. It does have some relevance in assessing potential conflicts of interest, as well as setting damages in a civil case.

      The point of ‘business model neutral’ fiduciary in my view is that one type of compensation does not “automatic” violate fiduciary duty up front. In other words, a type of compensation is not PROOF of a breach of fiduciary duty; it’s a factor to be assessed in considering whether fiduciary duty was breached.

      Thus, whether fiduciary duty was violated in principle would be based on the facts and circumstances of the case, where the type of compensation CAN be (but isn’t ALWAYS) a legitimate factor. Making that determination about whether it was relevant in a particular scenario is up for the court.
      – Michael

  • Robert Vogel

    I believe your analogy with contingency fees is apt when speaking of commissions, but I think it goes awry with ‘limited menu of products’ unless I am misunderstanding what that means. I assume that means you go to a firm that offers advice and products, and they recommend only the firm’s products. I do not think that is consistent with a fiduciary standard. The advice will clearly be tailored to the offering. The ‘advice’ in this instance is simply a sales tool and not an end in itself. I have a hard time believing that a product provider, or their representatives, can be a true fiduciary. They will always have to be in a position to give ‘advice’ that meets the need of the organization which is moving products. To borrow from your earlier post, this would be like the dietician that is employed by the meat council with a butcher shop on the side. She may be giving you good advice, but how could you ever be sure?

    • Michael Kitces

      Thanks for the feedback.

      The ‘limited menu of products’ phenomenon is an interesting one.

      Certainly, you point out a good concern here, but when I look at a lot of larger RIA firms, I actually see a similar limited menu of products. It’s just that their version of ‘limited menu’ is half a dozen “model portfolios” for the client to choose from – an increasingly popular way to make the practice more efficient as it grows. All conservative clients get the same ‘conservative model’ portfolio, and all aggressive clients get the same ‘aggressive model’ portfolio. Which ironically means in practice sometimes the RIA’s menu of products is actually more limited than the broker’s?
      – Michael

      • Robert Vogel


        That’s a fair point, although I do not think having model allocations is quite the same as recommending only the products your firm provides. It becomes even more dicey if your allocations are limited by the products provided by your firm. To return to the anology (am I beating the proverbial dead horse here?), a dietician is going to give out a lot of similar sounding advice to people trying to achieve the same goal (e.g. wieght loss, maintenance, lower cholesterol). If she works in a butcher shop, and receives most or all of her compensation from the shop or from the sales of meat, and all of her advice centered around meat, how would you ever know her advice was sound and unbiased?
        For color, this is an issue near and dear to me because at my former employer I was forced to recommend the worst large cap growth fund in existence (slight exagerration for effect) and try to justify it to my clients. This even as other parts of the business, like institutional and asset management, had given up on it. This, among other things, eventually drove me to leave the firm and has made he highly skeptical of the “advice” a product provider gives ever since.

  • Steve Smith


    This may be a technicality, but I don’t believe an investment portfolio is a product. Or that one is even made up of products. Stocks are not products. Bonds and CD’s are not products. A broad based index mutual fund is not a product. A separately manged account is not a product. Portfolios combining non-products into an asset allocation are not products.


    • Michael Kitces

      My concern is that it’s a distinction without a difference.

      For many RIAs, in practice the financial planners have no flexibility to go beyond the exact model portfolios and underlying investments that their firm utilizes on a firm-wide basis. Which means in practice, the RIA-based financial planner could actually offer LESS choice than a ‘broker’ with a larger menu of limited options.

      Again, I’m not sure this is necessarily fatal to fiduciary duty, as the coalition letter to the SEC points out as well. I just find it a striking similarity between how many ‘limited menu’ brokers and RIAs operate in practice.

      – Michael

  • Steve Smith


    You are way more familiar with practices accross the spectrum of RIA firms than I am. But there’s a big difference between: 1) an RIA firm deciding to be exclusively a passive management shop or 2) simply deciding not to include commodities in their portfolios and 3)a brokerage firm including in their approved product list only products that generate a certain amount of revenue.

    A consumer can look around at different RIA firms and learn about their methodology and choose one that matches their own philosophy and be reasonably sure that the picture they’re getting of each firm is based upon the firm’s investment beliefs, including what’s good for the firm’s financial viability.

    That’s the whole purpose of having an investment philosophy. To act as a funnel. You start with a dozen or so possible philosophies that can be populated with an infinite number of vehicles and you narrow it down to one philosphy and and populate it with a manageable number of vehicles. It’s up to the consumer to find a firm that matches their own philosophy.

  • Tommy Tavenner

    All interesting remarks. I agree that the “facts and circumstances” methodology is the correct one, and that the compromise letter is a step in the right direction. It has been my position from the beginning that we all are, or should be expected to be “fiduciaries”. This, in fact, is what the purchasing public “assumes”. And although, it may NOT be technically correct from a legal point of view, the culture of law-making in America always evolves to consumer protection, especially in an environment of financial illiteracy where “average Joes and Janes” are relying on advice that may or may not be leading to a sale. The letter may fail due to the fact that it makes too much “common” sense, for as we know “common sense ain’t too common”.

  • Allan Roth

    I recently wrote in AARP magazine that the CFP board allows both fees and commissions simultaneously.

    Per the CFP Board, Fiduciary duty is exercised by:

    1) The CFP double dipping and putting the client in a product with a 5.29% fee.

    2) Allowing the client to read hundreds of pages and a book to figure out the fees.

    3) Giving incorrect information (in writing) on surrender fees.

    4) Telling the client not to contact him anymore.

    This did not meet my definition of fiduciary. Both the insurance company and broker dealer saw fault and settled. The CFP Board, on the other hand, saw it as putting the client first.

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Michael E. Kitces

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