The SEC Must Act – A Uniform Fiduciary Standard for Providing Investment Advice is Needed to Protect Investors from Harm

WASHINGTON, D.C. – April 15, 2014 – Documenting the harm to investors resulting from gaps in the rules governing investment advice, investor advocates and industry representatives  are renewing their call for the Securities and Exchange Commission (SEC) to better protect investors by establishing a uniform fiduciary standard of conduct consistent with Section 913 of the Dodd-Frank Act. 

In a joint letter addressed to the five SEC Commissioners, the groups provided empirical evidence from academic research, market analysis, and observation of industry practices that illustrates the harm to investors that results from a regulatory system that allows brokers to offer investment advice under a conduct standard appropriate to a sales relationship rather than an advisory relationship.  Signatories to the letter include AARP, CFP Board of Standards, Consumer Federation of America, the Financial Planning Association, Fund Democracy and the National Association of Personal Financial Advisors. 

In their joint letter, the groups wrote:

“The bifurcated approach to regulating investment advice offered by broker-dealers and investment advisers reflects the failure of regulatory policy to keep pace with changes in market practices.  There is no justification for applying different standards of care to financial professionals who are offering the same services to investors.  Over the years, broker-dealers have not only identified themselves as financial advisers, but they have offered virtually identical services to investors in order to compete.  The Commission has permitted, at least tacitly, this evolution by failing to apply the appropriate regulatory standard.” 

“Investors suffer concrete harm -- in the form of higher costs and poorer performance – as a result.  The Commission has an opportunity to reduce this harm to investors without imposing undue costs or regulatory burdens by applying a fiduciary standard to both broker-dealers and investment advisers when they offer personalized investment advice to retail customers.  We urge the Commission to move forward expeditiously with a rulemaking, consistent with Section 913 of the Dodd-Frank Act, to achieve this goal.”

In addition to debunking any notion that a fiduciary standard will somehow prove injurious to investors, the letter notes that advice offered by a broker-dealer in a non-fiduciary capacity can significantly erode long-term investor returns: “As the Commission warned in a recent bulletin for investors, ‘[o]ver time, even ongoing fees that are small can have a big impact on your investment portfolio,’ reducing returns, shrinking a nest egg, and preventing investors from achieving financial goals.  This impact was illustrated in an October 2013 Bloomberg Markets Magazine report on data filed with the SEC which showed that ‘89 percent of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions, and expenses during the decade from Jan. 1, 2003 to Dec. 31, 2012.’  Brokers have an incentive to keep clients in managed-futures funds because they receive annual commissions of up to 4 percent of assets invested and investors pay as much as 9 percent in total fees each year.”

The groups also note that the absence of a fiduciary standard allows brokers to sell products with substandard features, which may be suitable but not in the client’s best interest.  Additionally, a broker-dealer’s reliance on a suitability standard instead of a fiduciary standard unfairly limits an investor’s options when seeking legal redress against their broker-dealer, according to the groups.

Significantly, the groups also note that there is no evidence to support the contention by some that better disclosure and enhanced investor education alone will offset the harm American investors suffer in the absence of a uniform fiduciary standard that is applicable to both broker-dealers and investment advisers when providing personalized investment advice to retail customers.

Maureen Thompson
The Hastings Group LLC
mthompson@hastingsgroup.com     
(703) 276-3251