The Times They Are A Changin’

With the pending release by the SEC of the new fiduciary rules, I have received a lot of e-mails and calls regarding the potential implications for currently registered  investment advisers.  Since investment advisers have been held to be fiduciaries under both the Investment Advisers Act of 1940 and various court decisions interpreting the Act, the new fiduciary rules should not have any procedural impact on currently registered investment advisers. 

If, as expected and hoped for, the SEC takes the common sense approach and simply adopts a universal “best interest of the client” fiduciary for anyone providing  investment advice to the public, the business model for broker-dealers, registered representatives and insurance companies offering investment products must make significant changes.  According to various reports, broker-dealers have accepted the inevitability of  a “best interests” fiduciary standard.  

However, not surprisingly, the insurance industry apparently continues to fight a “best interests” fiduciary standard.  Such a standard would have serious implications for some current insurance industry practices and products, most notably alleged overselling of coverages and variable annuities.  Based upon my own experience with the insurance industry, insurance sales based on actual needs sometimes becomes buy as much as possible.  Variable annuities raise a number of fiduciary issues given their typically high fees, inverse pricing structure and potentially disastrous impact on one’s estate plans.

A universal “best interests” fiduciary standard would continue to provide an edge to currently registered investment advisers as broker-dealers, insurance companies and their representatives adjust to the new standards.  It can be expected that some will simply ignore the new fiduciary requirements, continuing to do business the old way unless and until they get caught.   Some have predicted a significant increase in the number of independent investment advisory firms, the rationale being that if they have to meet a fiduciary standard anyway, why not increase their profit potential. 

Existing investment advisory firms will be able to tell both existing and potential clients that it’s business as usual, as their firm has always been required to put  a client’s “best interests” first.  Advisory firms may want to consider gaining an additional competitive advantage by pointing to a 2007 Schwab Institutional study that concluded that 75% of brokerage accounts did not match the client’s goals, following that up with an offer for a free portfolio review.

With the release of the new fiduciary standards, the financial services industry will definitely undergo a change.  Prudent investment advisors will recognize and seize upon the opportunity to gain or maintain an edge on their competitors.

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors and investment fiduciaries on sound, proven investment strategies that will help them protect their financial security and/or avoid unnecessary fiduciary liability exposure.
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