The fiduciary standard has become a hot issue for all advisors, whether registered rep or RIA advisor. It is impossible to know what legislative changes Congress will make in the next few months to the regulatory framework that governs both practice models, and then how those new rules will be applied by regulators and, finally, by firms. But one possibility is that the rigorous fiduciary standard, which has been the SEC’s yardstick to monitor the practices of registered investment advisors since the 1940’s, will be applied more widely to Series 7 registered representatives who provide retail financial advice. Today, registered reps. are held to a less stringent “suitability standard.” Another possibility is that RIAs will be monitored more carefully by regulators.
Indeed, over the past couple of months, the “fiduciary v. suitability” issue has been cropping up more frequently in my conversations with advisors. Many independent-minded advisors from the large firms would love to establish their own independent firms or join already established independents, in part due to pressure from their clients. But many of them are also wondering if they should “hit pause” in their exploration of a possible move to an independent b/d or RIA in light of pending changes to regulatory governance. These advisors are concerned that should they move to an independent FINRA-regulated firm, they might eventually be subject to a tougher fiduciary standard, but if they go the RIA route, they will both be subject to a tougher fiduciary standard and the SEC’s policing in a post-Madoff world will become more stringent. Some of these FA’s are opting to sit tight despite compelling reasons to leave their current firms.
But is waiting a smart idea? No, says New York securities employment attorney Brian Neville, partner in Lax & Neville, Esqs. “Concerns about pending regulatory changes should not guide an advisor . . . sound business decisions should,” Neville says. “Otherwise the tail wags the dog.” He believes that there will be major changes in the regulatory framework but that they will be a long time coming. “The final chapter won’t be written for at least five years,” he says. Others echo this sentiment. New regulatory and compliance challenges are on the way regardless of what kind of firm you work for, and three or more years is too long a time to put career decisions on hold.
Of course, some reps with whom I speak expect things to remain pretty much status quo. “I just don’t get what the big deal will be about moving to a fiduciary standard,” says Roger, one California wirehouse advisor. “The supervisory culture here is more restrictive than it would be if I were at any other firm regardless of whether I had my Series 7 or my Series 65 license because of the span of control issues here,” says Roger. That is, his firm has to enforce compliance oversight by managing to the lowest common denominator—the less experienced and non-compliant brokers. Roger further notes that he has always practiced putting the interests of clients first, providing full and complete disclosure, selecting proprietary products rarely and then only when they were the most appropriate choice for the client, making decisions based purely on the client’s needs as opposed to his own compensation.
Others think that a wider application of the fiduciary standard is inevitable and are opting to make a career move that will accommodate the fiduciary standard sooner than later. Take Gene, who has been a UBS advisor for the past 12 years in Florida. “I always heard the term ‘fiduciary standard’ and thought it was a bad thing; something I had to avoid at all costs,” says Gene. “But with everything that I have read about what it really means and the changes that Congress is proposing regarding advisor oversight, I’ve changed my opinion.” Gene believes that his clients already expect him to act in a fiduciary manner at all times.
Like many FAs, Gene has made the decision to move his practice toward an independent model. He has come to believe that independent firms can be more “nimble” and better monitor and regulate his practice according to his clients’ needs, whereas his current wirehouse firm is trying to serve too many masters, has too many inherent conflicts between the various kinds of clients it serves and services it offers.
While this could change, today, many broker/dealer firms limit the services their advisors can provide to clients so as to avoid triggering the fiduciary standard or increasing their legal liability in other ways. In the RIA world, the burden is on the advisor to supervise himself to a large degree, though that could change, too. Gene is currently exploring his options with several custodians and two independent firms to see whether he will be setting up shop as an RIA or as an independent rep with an existing broker dealer.
