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SEC Needs to Take Ownership of Fiduciary Duty Question

As we wait for details on the specific language of the DOL fiduciary duty rule proposal, the SEC continues to consider whether to propose a fiduciary duty rule for all those — including brokers — who provide personalized investment advice to retail investors. The reality is that most investors don’t understand the difference between fiduciary and suitability standards.

That’s according to a 2008 study commissioned by the SEC, which found that the majority of typical retail investors were confused over the titles and duties of their financial services providers.

For most people, the language of investments is an enigma, riddled with acronyms that sound like gibberish to those unaccustomed or untrained in the art of financial services. The different dialect is not unlike the difficulties most of us feel when trying to decipher computer code, which often devolves into a confusing and frustrating experience that conjures the expectation of more cost. 

The confusion has exacerbated the loss of trust in the investment sector. As the White House’s fact sheet points out, investors in some cases pay higher fees than needed without the benefit of receiving advice that is in their best interest.

Such behavior undermines investor trust, regardless of whether it occurs when people are investing for retirement or when they are investing savings for more immediate needs. Nor is trust improved by the language used in the fact which speaks of "losses" when the correct term is "higher costs."

It is into this realm that terms like “fiduciary” and “suitability" standards only add to the confusion and distrust. Fiduciary standards, on the other hand, have significant potential benefits to unsophisticated investors. They hold investment professionals who provide personalized investment advice to a legal duty of putting the interests of their clients ahead of their own interests. The CFA Institute Standards of Professional Conduct says that members "must act for the benefit of their clients, and place the clients' interests before their employer's or their own interests." 

But fiduciary standards also come with a cost. Greater responsibilities create the expectation of greater expertise, and greater liability. It is at this junction of client-focused advice and higher costs, however, where the DOL’s proposed fiduciary standard may price some lower- and middle-income investors out of the market. It also is where the process would benefit from leadership from the SEC's involvement.

The extent to which the DOL's actions could cause turmoil ultimately may depend on whether the SEC intervenes in the matter.   

The SEC has nearly 75 years of experience addressing the fiduciary requirements of investment professionals. It also has expertise with the type of investment products that are typically used for retirement purposes. It is for these reasons that CFA Institute believes having the SEC take the lead on this issue will add clarity to a situation that could become even murkier. 

Jim Allen is head of capital markets policy in the Americas at the CFA Institute.  

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