In the last year, The U.S. Department of Labor (DOL) and the Securities and Exchange Commission (SEC) have proposed or finalized a handful of regulations and enforcement initiatives, while Congress has passed major legislation that, taken together, are already changing the world of investments and retirement planning.
One of the most recent initiatives, issued in late January of this year, concerns the fiduciary: The SEC released a staff study recommending the implementation of a uniform fiduciary standard of conduct for broker-dealers and investment advisers that would require anyone providing "investment advice" to put retail and other customer interests ahead of their own financial interests.
Provided to Congress shortly thereafter, the study was required under the Dodd-Frank Wall Street Reform and Consumer Protection Act and looks into obligations and standards of conduct of financial professionals.
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The new fiduciary standard is a game-changer in that it replaces the suitability standard, which requires that advice simply be apposite, under which brokers have abided since the mid-1930s, with a fiduciary or "client's best interest" standard. The recommended change is intended to bring greater transparency and consistency to the standards of conduct that apply when retail customers receive personalized investment advice about securities.
According to the study, the new rule would be no less stringent than the current standard for investment advisers under the Investment Advisers Act of 1940 and would include the responsibility to act in the best interest of the customer. In other words, the new fiduciary standard would ensure disclosure and the utmost consumer protection.
One of the larger issues that the study hopes to address is how to handle conflicts of interest, particularly for brokers who both offer advice and sell products. Seeking to balance investor protection while still being flexible enough to accommodate varied business models, the study finds that "many investors are also confused by the standards of care that apply to investment advisers and broker-dealers" when providing personalized investment advice about securities.
While the development of a uniform fiduciary standard may lead to significant changes in the legal and regulatory landscape, it is necessary for individuals and companies to work closely with outside counsel to determine how they may be affected by SEC rulemaking in this area.
As investment advisors, gaining trust is paramount in order to protect the $13 trillion in investable assets owned by Americans today. It is necessary for financial advisors to serve as trusted informants and advocates on behalf of their clients. As fiduciaries, it is imperative that agents, representatives and advisors continue their professional development through training in best practices, prudent process, investment theory, conflict and negotiation, and client costs management.
Ultimately, the best business model to follow is to build a credible and trustworthy relationship with the client — this new fiduciary standard will help investment professionals do just that.
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