Article Originally Published: NAPFA Advisor
The fiduciary standard as understood in law for decades no longer exists. Most Main Street investors get a “suitability plus” standard at best.
Since 2009, when the Obama administration recommended brokers act as fiduciaries, the SEC has diminished fiduciary advice. SEC Chair Mary Schapiro then proclaimed that brokers and advisers are, “Merging to the point of, in some cases, relative indistinguishability. This is certainly evident from the retail investor’s perspective.”1 This remark should be viewed as starting the decimation of fiduciary best interest advice.
The Longstanding Legal Meaning of Advice and Brokerage Sales
The Investment Adviser Act of 1940 (IAA) put investment advice into federal law. The 1963 Supreme Court capital gains decision stated the IAA, “reflects a congressional recognition ‘of the delicate fiduciary nature of an investment advisory relationship.’” This meant:
“… Investment advisers could not completely perform their basic function—furnishing to clients on a personal basis competent, unbiased, and continuous advice regarding the sound management of their investments—unless all conflicts of interest between the investment counsel and the client were removed.”2
The court further stated the essential role of Fee-Only compensation. “Remuneration … would consist solely of definite, professional fees fully disclosed in advance.” There is no question that NAPFA’s 1982 origins reflect the IAA thinking noted by the Supreme Court.
Securities attorney Michael Koffler reminds us of what broker-dealers do: “Broker-dealers act for their own account or as agents of the issuer, principal under-writer, syndicate members or wholesaler … and are contractually obligated … to distribute the very securities that they provide advice and recommendations on to investors.”3
The adviser/broker difference is stark. A fiduciary adviser is legally obliged to put clients’ interests first and seek to avoid conflicts. In contrast, sales brokers are allowed to receive opaque commissions and third-party payments and earn their compensation from conflicts.
Until recently, the SEC affirmed these differences and warned advisers, “As a fiduciary, you also must seek to avoid conflicts of interest with your clients, and, at a minimum, make full disclosure of all material conflicts…” and “You should not engage in any activity in conflict with the interest of any client …”
A veteran SEC staff member added: “An adviser must act solely for the benefit of its client and must not place itself in a position of conflict with its client. An exception is made, (emphasis added) however, when the adviser makes full disclosure to its client and obtains the client’s informed consent.”
In 2012, Carlo V. di Florio, director, SEC Office of Compliance Inspections and Examinations, explained why conflicts of interest need to be avoided, noting
“Conflicts of interest can be thought of as the viruses that threaten the organization’s well-being. … even the simplest virus is a mortal threat to the body.”4
- SEC Speech before the New York Financial Writers’ Association Annual Awards Dinner (Chairman Mary L. Schapiro) ↩︎
- SECURITIES AND EXCHANGE COMMISSION v.CAPITAL GAINS RESEARCH BUREAU, INC., ET AL ↩︎
- https://thefiduciaryinstitute.org/wp-content/uploads/2024/04/Koffler-2009-Six-Degrees-of-Separation-Principles-to-Guide-the-Regulation-of-BDs-and-IAs.pdf ↩︎
- http://www.sec.gov/News/Speech/Detail/Speech/1365171491600#.VRBoKI4sq6U ↩︎
