The Institute for the Fiduciary Standard has produced a white paper on best practices that puts an emphasis on addressing "conflicts of interest," the "reasonableness and transparency of fees and expenses," and "communications that are clear, complete and truthful."
The white paper, "Key Principles for Fiduciary Best Practices and An Emerging Profession," focuses on the principles that should be the basis for best fiduciary practices going forward and how they differ from the principles on which brokerage sales practices are based, the institute said.
"These points in and of themselves may come across as being obvious," Knut A. Rostad, president of the Institute for the Fiduciary Standard, said during a conference call. "They may come across as being non-controversial, and they may come across as being sort of so blatant that you can ask, 'Well, why do they need to be identified at all?'"
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"But I think in the broader picture, in terms of practices that are out there now, they are not stressed nearly enough and that is a source of some of the problems that we have right now."
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The white paper points to "research and practical experiences anecdotally [that] demonstrate that there's a wide, wide group of investing clients that don't have a clue what they're paying in fees and expenses."
"These very straight-forward, very simple principles need to be restated and emphasized," Rostad said during the conference call. "I think it really gets down to what is being espoused on the brokerage side from the brokerage lobbyists who are aggressively opposing, and so far fairly successfully, the expansion of fiduciary duties on a regulatory level. These principles that seem so obvious and straight-forward are not being acknowledge or adhered to."
Rostad said the Institute for the Fiduciary Standard was prompted to write the white paper from "increasingly dim and hard-to-detect line between sales and advice" and the misconceptions investors have "about what it is that brokers do, what it is that advisors do, what their services are and what it is that they pay for their services, total fees and expenses."
As Chris Cannon, CIO at FirsTrust, and member of the Best Practices Board for the Institute for the Fiduciary Standard, pointed out during the conference call, the line between sales and advice may have become particularly muddled over the last decade, after being more clearly defined in the Advisers Act of 1940.
"I think it's interesting to note that [the Advisers Act of 1940] was created to make a clear and definitive line between what is a sales practice, and who are people that are selling securities and packaging them, and people who are offering advice," Cannon said. "Clearly sales practices saw what was working in many ways and what sells and the line started to drift further and further over from sales into the advice arena. And more and more things were being used that looked like advice on the sales side, and I think that's how we've gotten to where we are now."
History may be repeating itself, as Cannon alludes.
"It's, in many ways, gotten back to the same issues that needed clarification originally [in the Advisers Act of 1940]," he said. He suggests "going back and saying, 'What is it that we have forgotten, and what can we learn again?'"
The best practices will incorporate broad fiduciary duties in accordance with common law, statute, regulatory opinions, and the Advisers Act of 1940. The best practices will also reflect the high aspirations for the fiduciary standard expressed in the landmark Supreme Court decision, SEC vs Capital Gains Research.
In addition to the white paper, the Institute also announced Thursday that Brian Hamburger, CEO of Market Counsel, will serve as general counsel to the Best Practices Board. A Council of Advisors will also assist the Best Practices Board and the National Association of Personal Financial Advisors will help advance the Institute's best practices.
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Emily Zulz
Emily joined the ThinkAdvisor team as a reporter in the summer of 2014. She previously worked as a reporter for The Daily Journal in Kankakee, Illinois for a year and as a reporter and editor for The Daily Eastern News in Charleston, Illinois for two and a half years. Prior to joining ThinkAdvisor, Emily worked on Groupon’s editorial team in Chicago as a fact checker for three years. She graduated cum laude with a BA in journalism from Eastern Illinois University, and she has been the recipient of two journalism awards for her news reporting at daily newspapers.
