The uniform fiduciary standard has become a holy grail of sorts for the financial advisor industry.
Legends such as John Bogle tout how its the only way to ensure that the interests of average investors will be protected. Proponents of the single standard stress that the current dichotomy between the fiduciary standard applicable to registered investment advisors and the suitability standard utilized by registered representatives is confusing to investors who fail to appreciate that certain advisors are not "acting in their interest." Only with a uniform fiduciary standard, they say, will investors be safe from the current misleading bifurcated regime.
Well, like most things that come out of Washington, D.C. it's not quite that simple. You see, the uniform fiduciary standard has a catch. The financial services reform legislation, more commonly referred to as the Dodd-Frank bill, explicitly provided that any uniform fiduciary standard imposed by the SEC cannot prohibit commission-based compensation and cannot require that the advisor continuously monitor investments. These provisions were included out of Congressional concern that investors with smaller amounts of assets and lower incomes would otherwise not have access to the services of an advisor.
What is the practical result then if the SEC moves forward with its uniform fiduciary standard? We will now have two kinds of fiduciaries: "traditional" fiduciaries (e.g., RIAs) who do not receive commissions and have a duty to monitor their client's investments, and "new" fiduciaries (e.g., brokers) who are free to continue to accept commissions and are still not required to monitor investments.
Only in D.C. would calling financial advisors complying with two materially different sets of rules both a "fiduciary" be considered less confusing. Try coming up with a simple explanation for the meaningful difference between the current suitability standard and the "new" fiduciary standard other than it allows commission-based advisors to brand themselves as "fiduciaries."
The National Association of Plan Advisors, which includes among its members both RIAs and registered representatives, agrees that average investors need better information about the role of their advisors. But, the kind of "non-uniform uniform" fiduciary standard being considered by the SEC will certainly not accomplish that and will in fact lead to even more confused investors. Instead, a simple, standardized disclosure given to investors before engaging an advisor (and annually thereafter) which explains what standard the advisor is subject to (i.e., fiduciary or suitability), what services that entails, and how the advisor is compensated, would give investors the right amount of information so they can make the choice that works best for them.
American investors should not be treated like children. Labeling all advisors "fiduciaries" even though they operate under different sets of rules will not magically make the existing misunderstandings go away. Instead, lets tell investors clearly and honestly what is going on.
Sometimes the simple approach is indeed the best one.
Brian Graff is executive director of the American Society of Pension Professionals and Actuaries
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