Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
The SEC’s 2022 actions on fiduciary care are a reminder why a “real fiduciary™” standard will only thrive if advisors and planners make it so. Regulators cannot. It is not their job.
It never has been.
The words of Benjamin Franklin about the republic apply to advisors and planners about a standard of conduct. As he left the constitutional convention in 1787, he famously told a passerby that the founders created, “A republic, if you can keep it.”
Franklin and other founders believed a republic depended on a responsible citizenry. He later said, “Only a virtuous people are capable of freedom.”
This principle applies to fiduciary care. Advisors must keep the fiduciary standard; the SEC cannot.
The SEC sets a minimally acceptable regulatory standard, as evident in Reg BI, Form CRS and the interpretive release for investment advisors.
For example, in March this year the SEC staff provided guidance to investment advisors on Form CRS. Among other things, the opinion claimed that the term “fiduciary” in Form CRS is “extraneous.” That was an inexplicable and inexcusable staff opinion that is difficult to reconcile on multiple legal grounds. I wrote about this previously here.
In October, the SEC proposed a rule on outsourcing. The SEC suggested fiduciary duties were central to an advisor’s duties.
The role of fiduciary duties for investment advisors expressed in this October proposal are worth a review:
“An adviser has a fiduciary duty to its clients”, the SEC says, and that comprises “a duty of loyalty and a duty of care”. (page 12.) When a fiduciary “holds itself out” it implies, “it remains responsible for” its services. “Outsourcing” does not change an “advisers obligation under the Adviser Act.” (p. 13)
We also believe it is a deceptive sales practice … for an investment adviser to hold itself out as an investment adviser” and then outsource functions without ensuring the provider meets a fiduciary standard. This would be, “Misleading, deceptive and contrary to the public interest. Moreover, disclosure cannot address this deception.” (p. 14)
We believe it is essential for investment advisers to evaluate whether and how it will continue to meet its obligations … including its obligations as a fiduciary when it chooses to outsource.” (p.40)
While many advisers may be aware of risks and account for them … to engage service providers, our staff has observed that not all advisers (do so) … despite the existing fiduciary duty and other legal obligations applicable to advisers. (Emphasis added).” (p. 122).”
This proposal made fiduciary duties central to investment advisors. But it did not define what those duties mean and, instead, applied the “know it when I see it” rule former Justice Potter Stewart used to describe obscenity.
Legally, certain outsourced services must meet a fiduciary standard. This principle is well-established and, according to the SEC proposal, well-followed by investment advisors.
This proposal suggested that this rule is needed because “not all” advisors comply with their fiduciary duties. That not all advisors are in full compliance could be said of most SEC rules.
Commissioner Hester Peirce, who opposes the proposal, said advisors who are deficient are a small number, “likely … negligible.”
The proposed rule puts fiduciary duties at the center of investment advisor duties, and this is good.
The rule’s intent is plain and clear. But the proposal casts doubt as to how much practical good a new rule would serve when the compliance outcomes it seeks can be achieved by guidance and enforcement of already existing rules.
This proposed rule, however well-intended, is unnecessary and harmful. With its huge compliance burdens, smaller independent RIAs would suffer disproportionately and unnecessarily if approved.
Investment advisors and financial planners who wish to see a real fiduciary™ standard thrive in the marketplace must make those standards happen. Many have intuitively adopted Franklin’s words. They have reimagined the fiduciary duty of care and are reaching a higher standard for transparency, clarity and simplicity in setting and explaining client fees and services.
Many are also in their 30s, like Thomas Jefferson, who was 33 when he wrote the Declaration of Independence.
They get it. They know Franklin’s words about a republic and citizens are as true about the fiduciary standard and advisors and have set out to prove it.
Knut A. Rostad, MBA, is the co-founder and president of the Institute for the Fiduciary Standard, a nonprofit formed in 2011 to advance the fiduciary standard through research, education and advocacy.
Read more articles by Knut A. Rostad
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
