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New Best Practices Aim to Codify Advisors' Fiduciary Duty

A coalition of fiduciary advocates has unveiled a set of best practices for advisors that they envision could eventually become an industry certification, providing consumers with an easily recognizable designation that a financial professional is bound to act in their best interest.

The 11 principles, issued by the Institute for the Fiduciary Standard, aim to codify standards of conduct for the investment advice industry and help investors distinguish between "product sellers and advice givers," explains Knut Rostad, president of the institute.

"In recent times the meaning of fiduciary has been transformed. Investors have been confused, skeptical or downright distrustful of many financial professionals," Rostad said in a news conference announcing the best practices.

The institute is asking industry members and other interested parties to submit comments on the draft principles. Once the comment period closes March 9, a council of experts that Rostad's group has convened will review the feedback and aims to issue a final version of the best practices in June or July.


Rostad and others involved with establishing formal best practices see them as a way of drawing a bright line between fiduciary advisors who are duty-bound to put their clients' interests before their own, and other professionals -- including unscrupulous wealth managers -- who might prioritize their own profits and offer deeply conflicted advice.

"Far too often, the interests of asset managers and registered investment advisors overwhelm the interests of investors," Vanguard founder Jack Bogle, who co-chairs a council of advisors on the institute’s best practices, says in a statement. "In short, salesmanship has trumped stewardship in our nation's financial system. The time has come for the field of investment advice to return to its traditional values of fiduciary duty and trust."


As a starting point, Rostad notes that fiduciary advice requires technical qualifications -- such as education and experience -- and ethical criteria, namely "character, honesty and transparency."

The new best practices focus on the ethical dimension of fiduciary advice, calling on advisors to affirm in their engagement agreements with clients that they are themselves fiduciaries as that term is defined in the 1940 federal Investment Advisers Act, and that that definition "governs the professional relationship at all times."

Next, the institute is calling on advisors to generate documentation outlining the "reasonable basis" for advice provided that’s in the best interest of each client, including a description of the investor's goals and circumstances, as well as a more detailed explanation of the specific investment strategies the advisor has developed.

The best practices touch on several of the overarching duties that backers of a strong fiduciary standard advocate, including a duty to act "prudently" and in "utmost good faith," to avoid conflicts whenever possible and to control investment expenses.


For instance, the best practices call for advisors to provide clients with clear and truthful communication, to make all disclosures in writing and to issue, on at least an annual basis, a full accounting of the fees and expenses the client has paid.

Similarly, the guidance urges advisors to avoid forms of compensation that could create a conflict and potentially skew their recommendations, such as major gifts, certain sales commissions and third-party payments.

Taken together, the best practices are a response to what the institute describes as pervasive investor confusion about the business models of advisors and broker-dealers, including how they're compensated and what services they offer, a picture that's further muddied by convoluted explanations of fees and expenses.

Once the best practices are finalized, the institute will begin work on a verification system where a third party would evaluate an advisor's practice and determine whether to confer the fiduciary designation.

"These best practices really seek to make it very clear as to which side of the aisle a financial advisor sits on," says Brian Hamburger, CEO of the RIA compliance firm MarketCounsel, who is serving as chief counsel to the group that drafted the new principles.

Rostad stresses that his team has not yet worked out how the verification process will work, or whether it might take the next step of developing a formal industry credential through that review.

"I think that we are steps away from that right now, but that is clearly one of the options," he says.

But he argues that investors need better tools to help them navigate an increasingly complex financial services sector, and warns of a "deeply troubling" trend in Washington where the policy debate seems to be shifting toward a watered-down version of fiduciary duty that would sanction conflicted sales practices.


At the SEC, regulators have been considering whether to adopt a uniform fiduciary standard that would apply in equal measure to advisors and broker-dealers.

Rostad says he is skeptical that the commission will actually enact such a rule, but in the event that it does, he expects that the final regulation would fall well short of the best practices his organization is urging advisors to embrace on their own.

"Even if the SEC does proceed," Rostad says, "if this industry we call advice truly wants to develop into a profession, it's going to be because the practitioners themselves make it happen, and not because of any government regulators."

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