Washington Matters


A Uniform Standard for Financial Professionals

Karen Mracek

Securities regulators have a chance to stand for average investors.



It’s time for one standard of service for all professionals providing financial advice.

My reasoning is simple: Most individual investors don’t know there is a difference in standards among different investment professionals, which affects what is recommended for purchase and why.

For all the talk about consumer protection during the passage of the Dodd-Frank financial reform bill last year, this is one area that needs to be cleared up for the sake of the average investor.

The Securities and Exchange Commission prepared a report that showed -- no surprise here -- that most individuals are confused by the various titles and designations used by investment advisers and broker-dealers.

The report, required by Dodd-Frank, concludes there should be one fiduciary standard for anyone providing personalized financial advice. That standard requires a financial adviser to do what’s in the best interest of the client, regardless of the adviser’s own financial interest.

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Broker-dealers must also sell products suitable for clients. But because they are exempt from the Investment Advisers Act of 1940, they are allowed to take into account their own financial interests -- specifically, the size of their commission -- when selling a product.

While the SEC still needs to work out some specifics, the recommendation of a single standard is a step in the right direction, experts say. “Consumers shouldn’t have to guess whether the advice they get is in their own best interest, or in the best interest of their adviser,” says Marty Kurtz, president of the Financial Planning Association.

But the recommendation isn’t the end of the opposition to one standard. The SEC must now determine how broker-dealers are to implement the standard, a timeline for compliance and even how the new standard would ultimately be worded.

The commission went out of its way to express its desire that the new standard fit various business models, including commission-based advisers. It argues that consumers should still have access to a variety of “fee structures, account options, and types of advice that investment advisers and broker-dealers provide.”

But opponents of a single fiduciary standard say that broker-dealers who work on commission will ultimately be hurt by the change.

The additional costs and increased potential for liability could drive some professionals out of the market, says Terry Headley, president of the National Association of Insurance and Financial Advisors. That, he notes, “could result in middle- and lower-market investors having less access to the account services and investment advice that are currently being delivered by registered representatives of broker-dealers.”

The recommendation was also met with resistance from the two Republican SEC commissioners, Kathleen Casey and Troy Paredes. In a written rebuttal of the study, they question whether investors’ confusion actually causes them to be “systemically harmed or disadvantaged.”

This will undoubtedly cause newly elected Republican lawmakers to take a closer look at the recommendation. And Democrats may want to weigh in on the matter in light of President Obama’s recent pledge to do away with regulations that prove burdensome to businesses.

But SEC Chairwoman Mary Schapiro has long advocated for a single standard. Currently, the SEC has the authority to implement the new standard, thanks to Dodd-Frank, and the majority votes to set the new standard in motion.

The commission should take extra caution when hammering out essential details, including how to preserve a commission-style business model, a timeline for broker-dealers to comply and the official language of one standard of care.

But it shouldn’t back off adopting the uniform standard.



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