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Schwab: Fight Over Fiduciary Interpretation Is ‘Semantics’

The RIA custodian believes the SEC’s change of language around the fiduciary standard is inconsequential.

The Securities and Exchange Commission approved its package on broker and investment advisor standards of conduct last week, but there’s a debate going on regarding its new interpretation of what being a fiduciary entails under the Investment Advisers Act. Commissioner Robert Jackson Jr., the lone dissenter during the votes for the package, called out the agency for removing language from the original proposal requiring investment advisors to “put clients’ interests first.” But in a roundtable discussion, Schwab executives said the change in language is inconsequential to how investment advisors actually do business. 

“[Jackson] was arguing that the language of the standard should be, ‘Put the client first,’ and he believes that is distinctly different than saying that ‘the broker cannot put his own interests ahead of the client’s interests.’ It’s a matter of semantics to me,” said Jeff Brown, head of legislative and regulatory affairs at Schwab, which serves over 7,500 registered investment advisors with $1.6 trillion in assets. “If I have to put [a] client’s interests ahead of mine, am I not putting the client first?”

Some investor advocates and others have argued that the language undercuts the role of investment advisors. “I find that a bit ridiculous,” Brown added.

Common law, after all, allowed advisors to disclose conflicts to their clients and have clients consent to those conflicts.

“It’s not as if the SEC changed common law at all,” Brown said. “They kind of codified what has always been the principles-based interpretation of fiduciary held by the SEC. I don’t see a big change here. Will advisors permit greater conflicts and then just disclose them? I don’t really believe that’s the case.”

Investment advisors will still be fiduciaries, he added, a competitive advantage over brokers.

“When you’re talking to clients, ‘I’m going to be a fiduciary,’ and a broker says, ‘I’m going to be your best interest,’ those two don’t necessarily equate,” Brown said.

That said, while Schwab was hoping the SEC would make Regulation Best Interest a “fiduciary” standard, the firm believes it is a stronger standard than brokers have had to date. But the practices will change on the broker side, not the advisor side. 

“It will work for investors.”

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