As the Senate passed the Financial Reform Bill (aka FinReg) 60-39 last Thursday, many investors and financial advisors are speculating about how this legislation may affect the financial services industry—specifically the relationship between investment advisors and retail consumers. FinReg was passed for three vital reasons: to end the “too big to fail” mentality, to protect the taxpayer by ending bailouts, and perhaps most importantly to protect consumers from unscrupulous financial practices. Some advisors fear that the implementation of a fiduciary standard will somehow inhibit investment opportunities and give the SEC overpowering regulatory authority. It is important to note that passing FinReg does not automatically create a fiduciary standard for investment advisors; it merely tasks the SEC with engaging in a six-month study to determine whether brokers provide investors with advice under a fiduciary standard (as defined in the Investment Advisers Act of 1940). In my eyes, that six month period gives Wall Street a chance to ‘fight back’ against these game-changing rules, or prepare for them, or some combination of both.
But what would a fiduciary standard really mean for advisors? It would create an environment in which brokers and advisors must choose “the best” option for their customers as opposed to merely a “suitable” option which is currently how the rules work. The “best” option, as defined by The Committee for Fiduciary Standards would be an option that: puts the clients interests first, that doesn’t mislead clients (discloses all facts), and that avoids conflicts of interest. Essentially, the fiduciary standard would create a more honest and efficient relationship between the advisor and the consumer.
Specifically, the fiduciary standard would affect areas such as 401k plans. The way most defined-contribution plans currently work, there is a direct conflict of interest between plan participants and the brokers who provide advice about the plan. Brokers who implement retirement plans typically get paid based on the level of assets in the plan and the specific investment vehicles chosen for the plan. Under FinReg, you may actually see investors getting lower-cost investment vehicles and better investment advice, something they aren’t used to but desperately need. In theory, this could help the 401k vehicle attract more money in the future if consumers become more comfortable with the investment vehicle and advice. This would be a great trend considering the pension system in America is rapidly disappearing and people need to be able to rely more on defined-contribution plans including 401ks and 403bs.
As an advisor, I don’t fear or lobby against financial regulation. While the implementation of new legislation is often backwards and inefficient, the theory underlying this legislation is good for consumers. In my specific case, I don’t think complying with a fiduciary standard would force me to change the way I do business. I already choose the investment vehicles and asset allocations which I consider to be best for my clients. All advisors should be doing that. If they aren’t, and are choosing investment products based on the size of the commission they pay, that’s a problem that needs to be corrected. Furthermore, I feel that creating a more open and informed atmosphere will encourage more people to invest their earnings which will benefit both advisors and retail consumers.
Premier Financial Advisors, Inc.
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New York, NY 10022
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Special thanks to Samuel Sverdlov for his contributions to this article.
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.