Compared to the media hubbub about issues such as gun control and the budget, the fight over the "fiduciary standard" gets little attention. Yet decisions made in federal bureaucracies this year could permanently change the way Americans get financial advice.
At issue: the fact that financial advisers live by two different sets of rules. Most independent advisers are "fiduciaries," obligated to put client interests first, much like a doctor. A 2010 survey found 76% of investors think all advisers must meet this standard.
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They're wrong. Many other professionals call themselves financial advisers, yet their only obligation is to sell products that are "suitable" for clients. For example, risky biotech stocks aren't suitable for an elderly widow on a fixed income. Non-fiduciaries, often brokerage firm employees, get incentives to steer clients to certain products, often through commissions or load fees.
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The Financial Planning Association, consumer groups and fiduciary advisers like Harold Evensky are pushing to make anyone who gives financial advice a fiduciary. Brokerage industry lobbyists say strict rules would end up killing off many forms of commissions, a key way that financial advice is paid for. That would mean less advice for everyone, they say. Advocates reply that much of this commission-funded advice is so full of conflicts of interest that the average investor would be better off without it.
The issue has been on the plate of the Securities Exchange Commission since 2010. The confirmation of SEC's new chairman, Mary Jo White, could mean a decision is on the way. Or another regulator could step in. In January, Assistant Secretary of Labor Phyllis Borzi called the fiduciary rule a "critical consumer protection." The Department of Labor has promised a rule by July that could apply the fiduciary rule to the trillions of dollars in individual retirement accounts (IRAs).
In the U.K. regulators have already acted. The rules there look like a brokers' worst nightmare. The U.K.'s Financial Services Authority bans commissions on some products and requires advisers be paid with hourly fees. "Where else would you buy something without knowing in advance how much it costs?" the FSA's head of investment intermediaries said in a statement.
