Upon Further Review: Do We Already Have a Universal Fiduciary Standard?

The debate over a universal fiduciary standard for the financial services industry continues.  To date, as John Adams lamented in “1776,” “piddle. twiddle and resolve, not a damned thing do we solve.”

Several studies have conclusively shown that the American public is confused over what duties various financial professionals owe the public. Both the Department of Labor and the Securities and Exchange Commission have stated that they are studying the issue. The Department of Labor actually released one version of a universal fiduciary standard, but withdrew the proposal.

The Department is reportedly set to release a new proposed fiduciary sometime around the middle of the year.  Given the tendency of the Securities and Exchange Commission to engage in partisan politics and protect the securities industry rather than protect the public, the best bet for any type of meaningful fiduciary standards is probably the Department of Labor.

Through all the debate and posturing over a universal fiduciary standard, one simple question remains – What is so onerous, so unfair, about requiring that anyone that provides financial or investment advice to the public must always put the public’s interest ahead of their own financial interests?

Opponents of such a requirement have argued that the requirement would prohibit sales of investment products, which would thereby increase the cost of financial advice to the public. A Congressional caucus actually came out and made this argument.

This argument is disingenuous at best. A universal fiduciary standard could still allow the sale of investment products as long as such products were fair and such sales were always in the customers best interests. The Department of Labor has already indicated that their new fiduciary proposal will allow such activity. But is that really the sticking point, or is it the fact that the fiduciary standard would require every financial adviser to always act in a  customer’s best interests instead of acting first and foremost to promote the adviser’s financial interests?

Is this whole debate over a universal fiduciary standard actually a moot point? While I am a staunch advocate for a clear, unmistakable universal fiduciary standard so that there is no question about the duties every financial adviser owes a customer, I would suggest that anyone who provides financial and investment advice to the public is subject to the fiduciary standards.

There are basically four ways that an adviser acquires fiduciary status: by contract or express agreement; by state common laws and/or federal regulations; by control over a discretionary account; and by having de facto control over a non-discretionary account.  While the first three methods are fairly obvious, the fourth method is a method that many financial advisors may not be familiar with.

The courts look at various factors in determining whether an adviser had de facto control over an account. As the courts have stated,

[t]he touchstone is whether or not the customer has the intelligence and understanding to evaluate the broker’s recommendations and to reject one when he thinks it unsuitable.(1)

the issue is whether or not the customer, based on the information available to him and his ability to interpret it, can independently evaluate his broker’s suggestions.(2)

If the answer to these questions is in the negative, then the likelihood is that the adviser will be deemed to have had de facto over the customer’s account and they will be held to a fiduciary standard in their dealings with the customer and the account.

Registered investment advisers and their representatives are fiduciaries.  Those holding themselves out as financial planners and/or offering to provide financial planning services to the public are fiduciaries. Stockbrokers who manage customer accounts on a discretionary basis are fiduciaries.  The argument has always centered on the applicable standard for stockbrokers involved with non-discretionary customer accounts.

And yet, an argument can be made that the new suitability rule, FINRA Rule 2111, all stockbrokers must adhere to the fiduciary standards and always put their customers’ best interests first ahead of their own financial interests. Rule 2111 was introduced in FINRA Regulatory Notice 11-02, with subsequent notices of guidance in FINRA Regulatory Notice 11-25 and FINRA Regulatory Notice 12-25.

While Rule 2111 was designated as a rule on suitability, many readers took particular notice of footnote 11. Footnote 11 is significant in that it referenced previous enforcement and disciplinary proceedings which addressed a stockbroker’s duties in terms of a customer’s “best interests,” more specifically that “a broker’s recommendations must be consistent with the customer’s best interests” and “a broker’s recommendations must serve his client’s best interests.”(3)

The references to a customer’s “best interests” raised immediate questions among many given its similarity to the fiduciary duty of loyalty set out in both the Restatement of Trusts and the Employees’ Retirement Income Security Act (ERISA).  The current debate over a universal fiduciary standard is due in large part over the fact that the “suitability” so often referred to as the applicable standard for stockbroker does not require that recommendations provided to customers necessarily be in their “best interests.”

To its credit, FINRA did not backtrack from its position that broker’s recommendation have to be in a customer’s best interests.  FINRA responded by noting that the position had been clearly stated in numerous cases and that the “best interests” requirement  “prohibits a broker from placing his or her interests ahead of the broker’s interests.”(4)

You make your own decision, but the prohibition against the broker putting his or her interests before those of a customer sound very familiar to language requiring that a ERISA fiduciary always put a client’s interests first, with “an eye single to the interests of the participants and the beneficiaries,”(5) with ERISA’s requirement that a fiduciary act “solely and exclusively” for the benefit of the plan’s participants and beneficiaries(6) , and the Restatement of Trusts’ requirement, in compliance with the fiduciary duty of loyalty, that a fiduciary act solely in the interests of the beneficiaries.(7)

The Department of Labor has indicated that they modify the fiduciary duties to allow for sales of investment products, which would not otherwise be allowed under common fiduciary guidelines. I personally have no problem with allowing such an exception as long as any such sales could be proven to be consistent with the requirements that such sales are primarily in the customer’s best interests both in terms of risk management and cost efficiency.  There should be no valid argument such a requirement, as FINRA, by virtue of Rule 2111 has indicated that such a requirement already exists for brokers.

So the common argument against a universal fiduciary standard, namely that it would result in higher costs for customer’s, makes no sense since requiring all stockbrokers to put a customer’s interests first is already the applicable standard. Enacting a universal fiduciary standard would simply be a codification of the applicable standard for both registered investment advisers, brokers and anyone else purporting to provide investment advice to the public.

From the public’s perspective, a universal fiduciary standard would eliminate the confusion which obviously exists regarding what duties are owed by one’s financial/investment adviser and better protect the public in their dealings with investment professionals, both of which are consistent with the mission statements of both the Department of Labor and the Securities and Exchange Commission.

So, in response to my original question, there is nothing onerous or unfair about requiring that anyone that provides financial or investment advice to the public must always put the public’s interest ahead of their own financial interests? In fact, that is actually the current standard for both registered investment advisers and stockbrokers.

So if either the Department of Labor and/or the Securities and Exchange Commission refuse to adopt a universal fiduciary standard in order to better protect the public, the public has a right to know the true reason for not doing so. Americans are getting tired of the continuous cover-ups and misinformation, the partisan politics that deny the public the protection they need.

As the court recognized in Archer v. Securities and Exchange Commission,

[t]he business of trading in securities is one in which opportunities for dishonesty are of constant recurrence and ever present. It engages acute, active minds trained to quick apprehension, decision and action. The Congress has seen  fit to regulate this business.(8)

The mission statements of both the Department of Labor and the Securities and Exchange Commission recognize a similar duty to protect the public with regard to investment related activities that impact investors and employees.  Therefore, the failure of either agency to pass a universal fiduciary standard in order to provide the public with a simple, yet meaningful, expression of their rights and protections in their dealings with financial/investment advisers will be yet another in a growing list of government breaches of the public’s trust.

© Copyright 2013 InvestSense, LLC.  All rights reserved.

This article is for informational purposes only, and is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances.  If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.


1. Follansbee v. Davis, Skaggs & Co., Inc., 681 F.2d 673, 677 (9th Cir. 1982)

2. Carras v. Burns, 516 F.2d 251, 258-59 (4th Cir. 1975)

3. http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p122778.pdf

4. http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p126431.pdf

5. DiFelice v. U.S. Airways, 497 F.3d 410 (4th Cir. 2007)

6. 29 U.S.C.A. Sections 1104(a)(1), (a)(1)(A)(i), and (a)(1)(A)(ii)

7. Restatement (Third) Trusts, Section 78 (Duty of Loyalty)

8. Archer v. Securities and Exchange Commission, 133 F.2d 795, 803 (8th Cir. 1943)

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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