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?