What kind of responsibility do you expect from a financial advisor? Most people would answer that question with any of a number of qualities: honesty, integrity, experience, knowledge, education, and so forth. As far as the main industry regulatory bodies are concerned (the SEC and FINRA), there are two acceptable standards of care advisors must meet. “Registered Representatives” (informally “brokers”) are required to know their customers and make “suitable” recommendations to them. Investment Advisor Representatives are held to a higher standard requiring us to act as “fiduciaries,” or in a way that always puts the client’s interests first.
Investors are often surprised by this double standard. Some people are shocked that anyone would not be required to act as a fiduciary, while others expect that no one in the industry really has their best interests in mind. But the double standard is very real and very established, dating back to the Investment Advisors Act of 1940.
Regulators don’t like the double standard either. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act requires regulators to study whether the fiduciary standard should be applied more broadly. As fiduciaries ourselves, we’re tempted say “Yes, of course!” But, that may not be the right answer. It might not make sense, for example, to require that brokers selling to sophisticated institutional investors also be fiduciaries. There is also the added, and admittedly difficult to quantify, cost of the more rigorous regulation. Some estimates suggest that only 20% of advisors are currenntly held to the fiduciary standard; if that number increased dramatically, the associated oversight costs may go up as well.
We think individual investors should seek an advisor who will put their interests first. Understanding the different standards is important. Hopefully as consumers learn about the double standard and the implications for their money, they will demand a level playing field. If consumer-driven demand materializes, regulators will certainly have to address this aspect of Dodd-Frank.