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Financial Reform Bill Sorely Lacks Fiduciary Standard

By Humberto Cruz, Tribune Media Services,
Cruz, Humberto - Savings Game
Posted 07/16/2010 at 6:51 pm EST

We don't have to wait six months despite what Congress did. We don't have to wait at all to make sure those who give us financial advice put our interests first.

Just ask your advisor to agree -- in writing -- to adhere to five principles espoused by The Committee for the Fiduciary Standard (www.thefiduciarystandard.org), a group of nationally known and respected advisers.

The five principles: Put the client's best interest first. Act with prudence; that is, with the skill, care, diligence and good judgment of a professional. Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts. Avoid conflicts of interest. Fully disclose and fairly manage, in the client's favor, any unavoidable conflicts.

"It's like Mom and apple pie," said Harold Evensky, a certified financial planner in Coral Gables, Fla., and member of the committee. "Who could object?"

Well, lobbyists for the brokerage and insurance industries did. Rather than mandate a fiduciary standard, a financial overhaul bill passed by Congress this month directed the Securities and Exchange Commission to conduct a six-month study.

"Main Street investors should be disappointed Congress decided not to provide them with the much-needed immediate benefit of the fiduciary standard," said Denise Voigt Crawford, president of the North American Securities Administrators Association (NASAA), a group of state regulators.

Still, that's better than the 18-month study -- a blatant delaying tactic -- originally included in the bill.

The SEC, after conducting the study, is authorized, but not required, to promulgate rules to provide that "the standard of conduct for all broker-dealers and investment advisers, when providing personalized investment advice, shall be to act in the best interest of the customer without regard to the financial or other interest of the broker-dealer or adviser providing the advice."

The SEC is also directed to "examine and where appropriate" promulgate rules prohibiting or restricting certain sales practices and conflicts of interest.

"Now it will be up to the SEC to deliver on this promise, but we are confident that progress on this long-delayed reform is finally on its way," said Barbara Roper, director of investor protection for the Consumer Federation of America.

Currently, registered investment advisers must adhere to the fiduciary standard. Stockbrokers and some others who give advice on securities are generally held to a lesser "suitability standard," which basically means making recommendations consistent with the client's goals and risk tolerance.

They are free to recommend, for example, a high-load mutual fund or high-expense variable annuity that pays them a bigger commission even if they know another product would be better for the client.

Despite its importance -- NASAA considers it the key investor protection issue in the financial reform bill -- the call for a uniform fiduciary standard has drawn little public attention compared to bank regulations and other controversial issues in the 2,300-page bill. Nearly three-quarters of investors in a recent nationwide survey by the investment technology firm Envestnet were not aware of the debate over the fiduciary standard.

"Today, many investors are investing in the dark," said Knut Rostad, chairman of The Committee for the Fiduciary Standard. "They don't see conflicts and expenses that cost them dearly, because non-fiduciaries are allowed to put their own interests ahead of investors and conceal this vital information.

"The most difficult issue is transforming a sales culture into a service culture. A key sign of how well the SEC meets this challenge will be how well the SEC turns on the lights, requires effective disclosures investors understand, and stops investing in the dark."

(Send questions or comments to Humberto Cruz at AskHumberto@aol.com or c/o Tribune Media Services, 2225 Kenmore Ave., Buffalo, NY. 14207. Personal replies are not possible.)


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