At a Marketcounsel conference this fall, I tookpart in a roundtable on regulatory developments and the emergence of a harmonized fiduciary standard. One thing became apparent: Most advisors are still not clear on the issues. Here is my take on what is happening.

Q: What does it mean to be a fiduciary? What does "best interest" mean? What is "due diligence"?

A: To act as a fiduciary is to serve in a relationship of trust and confidence that carries with it duties of loyalty, due care and utmost good faith. For investment and financial professionals, acting as a fiduciary means serving the best interests of the client and providing disinterested advice. When acting in a client's best interest, the professional has an undivided duty of loyalty focusing on the client's investment needs and objectives, avoiding conflicts of interest, and providing quality services and products.

Due diligence is how professionals show they're exercising skill and good judgment. It means taking the time to understand the client, including his financial situation and investment objectives; having a clearly articulated investment strategy that has been tested; and recommending products that the professional has researched and believes fit the investment strategy. Documentation showing the steps the professional took in developing a strategy and choosing products is a key part of due diligence.

Q: How does the SEC view fiduciary duty? Do commissioners agree with one another?

A: SEC Chair Mary Schapiro, Commissioner Elisse Walter and Commissioner Luis Aguilar appear to agree that a fiduciary standard should apply to all financial professionals who provide advice to investors. Walter has acknowledged that "financial professionals should always act in the best interests of investors." Schapiro and Aguilar each have emphasized fiduciaries' duty to put client interests before their own.

Although it is clear that the commissioners agree that the client's best interests are of primary concern, it is not clear that they agree on how the standard should work in practice. Where do you draw the line on what is and isn't advice? What are the exact obligations of a fiduciary when providing advice? What types of conflicts must advisors always avoid? What conflicts can remain if properly disclosed to the client? How does the fiduciary duty work in different contexts, such as principal trading, selling proprietary products and earning commissions? There are many issues the SEC must address through rule making in order to uniformly apply the fiduciary standard, but the direction the SEC will take is uncertain.

Q: What does harmonization mean? Is it code for suitability?

A: Schapiro introduced the term in testimony before Congress and it has taken on a life of its own. Two harmonization issues are being debated: harmonization of the standards of care for broker-dealers and investment advisors, and harmonization of rules.

Proponents of harmonizing the standards of care recommend adopting a hybrid standard that would dilute fiduciary duty and bring it closer to a commercial suitability standard. It's becoming clearer, however, that when harmonization was introduced, policy and lawmakers were not proposing a lower standard of care; rather, as described in the Obama administration's plan for regulatory reform, the primary goal has always been to raise the standard for broker-dealers, who provide advice, to that of a fiduciary. Harmonization was a secondary goal aimed at aligning the legal framework of financial professionals based on the fiduciary standard. Schapiro and Walter have both advocated consistent rules for broker-dealers and investment advisors.

Q: How will the Investor Protection Act affect practitioners?

A: The Investor Protection Act made it through the House Financial Services Committee in early November and was referred to the full House. It will be part of a comprehensive financial reform bill that Committee Chair Barney Frank would like to have ready for President Obama's signature by Christmas. Under the legislation, the SEC would have authority to adopt rules that: (1) apply a fiduciary duty to broker-dealers and investment advisors who provide personalized investment advice to retail customers; (2) restrict or prohibit sales practices, conflicts of interest and compensation schemes contrary to investors' interests; and (3) require simple, clear disclosures to investors regarding their relationship with their financial professionals, including any material conflicts of interest. Financial products will likely change, and professionals who have not previously functioned as fiduciaries will see changes in their training, supervision and compliance programs.

The SEC has not said how its process will address practical application of the fiduciary duty. So professionals must watch the status of the legislation and SEC rule making. At this stage, advisors can provide input on the practical implications of the rules.