Fiduciary Duties for All Financial Advisors Gaining Momentum

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The Department of Labor and the U.S. Securities and Exchange Commission may soon be fighting to see who can implement the fiduciary standard first on the financial advisors and brokers they (independently) regulate.  SEC Chair Mary Jo White on Tuesday told an industry conference that the SEC should have “uniform fiduciary” standards for financial professionals under its purview.  The comments follow an announcement a few weeks ago by President Obama concerning the need for a rule by the DOL on higher advisor fiduciary standards for retirement account advice.

The law has held them to a suitability standard for years when recommending transactions to retirees and holders of retirement accounts. Under this standard, an advisor must have a reasonable basis for believing that a recommendation is suitable for you considering your income, risk tolerance, objectives and other holdings.  A previous proposal several years ago to heighten the standard for retirement advice faced bipartisan opposition and was withdrawn.

The cost of hidden fees and backdoor payments at issue has been estimated at approximately $17 billion a year in a report published by the White House.  At the end of February, President Obama proposed that the Department of Labor require financial advisors to retirement accounts put their client’s interests ahead of their own personal gains.

The SEC currently holds investment advisors to the fiduciary standard but permits the 4,500 brokers within its oversight to use the lower suitability standard for what has been called essentially the same conduct.  White proposed a uniform standard for both and a third-party compliance program to address the agency’s insufficient resources to monitor brokers and advisors.  The Wall Street Journal reported that SEC officials can only audit advisors once a decade due to their manpower.   The groundwork for action by the SEC in this arena was laid Dodd-Frank. To implement any changes, two of the four other commissioners would also have to agree to them.

The Wall Street Journal predicted that there would be calls for the Department of Labor and the SEC to collaborate in this arena. They have consulted with each other in the past but the Department of Labor’s proposed rules haven’t been published yet.  Shortly after President Obama’s proposal, a bill introduced into the House sought to delay the implementation of any rules until after the SEC acted.

Why is this an area of interest for us?  Because corporate policies compromising the investment advice of brokers and financial advisors could become the subject of SEC whistleblower tips.

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