Industry Groups Urge Congress to Oppose Watering Down a Uniform Fiduciary Duty

Stacy Schultz published this article in Financial Planning Magazine:

"Six leading industry groups wrote a joint letter to the House Financial Services Committee throwing their support behind a fiduciary duty that would cover all who offer investment advice. The organizations also voiced their concerns that new legislation could weaken the current standard stated in the Investment Advisers Act, the accepted highest standard in the industry today.

The groups, in their letter, also called an amendment offeredby the American Association of Life Underwriters "particularly harmful.”

The letter was written and signed by the CFP Board of Standards, the Financial Planning Association, the Investment Advisers Association, the North American Securities Administrators Association, the National Association of Personal Financial Advisors, and the Consumers Federation of America.

In the letter, the groups urged Congress to add a strong provision to the proposed Investor Protection Act, that would hold all those giving financial advice to the fiduciary duty standard set up in the Investment Advisers Act.

Independent registered investment advisers currently adhere to this standard. A fiduciary must act in the “best interests” of a client. But registered representatives generally rely on the “suitability” standard. That is they can recommend products that are deemed suitable for a client.

The groups pointed to several concerns over the proposed legislation. First, they expressed concern over the phrase in the proposed act that says, “when providing personalized investment advice.” The groups fear that phrase might be used to argue that so-called “hat switching” by brokers is allowed. “By ‘hat switching’ we are referring to the common practice where the same financial intermediary provides investment advice under a fiduciary duty and then executes the recommended transactions under a lower suitability obligation,” the groups said in the letter. “Brokers have consistently sought to limit the fiduciary duty so that it would not apply to the sales recommendations intended to implement the advice.”

Second, the groups, in their letter, pointed to the language requiring rulemaking by the Securities and Exchange Commission that addresses personalized advice to retail clients. “Currently, an advisor’s fiduciary duty under the Advisers Act does not vary depending on the type of client served. We do not believe it is appropriate to have different standards for different types of clients. All investors receiving personalized investment advice should benefit from the protections of the Advisers Act fiduciary duty,” the groups’ letter stated.

The groups, in their letter, also called an amendment being put forward by from the American Association of Life Underwriters “particularly harmful.” That amendment, the letter said, “would limit the definition of ‘investment advice’ to situations in which commissions are not part of the fee paid to the services provider.” The groups complained that the amendment “would allow brokers to provide investment advice under the lower suitability standard. It would also restrict the options available to investors by eliminating the ability of investors to receive a combination of fee-based investment advice and commission-based implementation all subject to a fiduciary duty. We urge you to strongly oppose this or any similar amendment that may be offered."