Members and investors realize the importance of putting the client’s interest first. Standard III.A. of the CFA Institute Code of Ethics and Standards of Professional Conduct requires that “Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.” Members also want an even playing field rather than one in which the lower behavior thresholds of one group damages the reputation of those held to higher standards of care.
Currently, those who provide financial advice adhere to two standards of conduct: (1) a fiduciary standard for “advisers” who are registered with the SEC under the Investment Advisers Act of 1940; and (2) a suitability standard for brokers and others that refer to themselves as “advisory” in nature. The suitability standard of care is lower than a fiduciary duty and requires only that the broker has a reasonable basis to believe a recommended course of action is suitable for the customer based on reasonable inquiry into the customer’s investment profile.
This dual structure of care creates a number of serious problems, including:
- Brokers are able to take advantage of the goodwill and trust implied by the higher, fiduciary standard of care without making the interests of clients first preeminent;
- Those not subject to the fiduciary standard create confusion among investors, not least by calling themselves "advisors" even while not being registered as advisers;
- Self-interested actions by those not subject to the fiduciary standard of care undermines the goodwill and trust associated with many prudent and client-oriented advisers.
Regulation
The SEC is in the process of considering the applicable standard for those who provide personalized financial advice to retail investors. Although the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) gave the SEC authority to impose a fiduciary duty of care upon brokers or dealers that already was required of investment advisers when giving personalized investment advice, it stipulated that the broker/dealer would not "have a continuing duty of care of loyalty to the customer after providing" the advice. This solution was quickly recognized as unworkable. In the summer of 2017, the SEC indicated it would be considering a new standard.
The DOL, which has authority over some types of retirement plans under the Employee Retirement Income Security Act of 1974, adopted in 2016 a best interest standard of care for those who provide personalized investment advice for a fee to retirement fund and IRA account holders. The DOL rule became applicable 9 June 2017, with a full phase-in of all requirements extended to 1 July 2019. The Trump administration has directed the agency to review its rule, as adopted, as to whether it causes investors harm, among other things. In the meantime, the DOL is considering other approaches that may meet the best interest standard.
CFA Institute Viewpoint
CFA Institute has long called on the SEC to adopt a fiduciary duty standard for all who provide personalized investment advice to retail investors. It also has advocated for an approach that makes it clear to investors the standard of care held by those servicing their accounts. In particular, we believe that clarification of the use of titles would substantially mitigate investors’ confusion related to the standard of care under which their service provider operates. Those who refer to themselves as “financial advisors” and provide personalized investment advice should have to register with the SEC as investment advisers and be held to a fiduciary duty standard. Broker-dealers should have to disclose on client documents that they adhere to a suitability standard and are not required to have the client’s best interests in mind.
CFA Institute had hoped the SEC would act first to address this issue, but it supported the underlying objective of the DOL rule—to act in the best interests of clients. Although the rule that was adopted addressed a number of concerns, it remains overly complex and difficult to apply. In addition, legal challenges to the rule and differing court rulings make the future of the DOL rule uncertain.
Meanwhile, the SEC has indicated that it is working on a new regulatory proposal to address the issues of titling and standards of care for financial advice providers.