Bellaire says some rules would need to be changed in applying the fiduciary standard imposed under the Investment Advisers Act of 1940. "We recommend a new standard of care with a much more effective client disclosure system that keeps costs down," he says. For example, Bellaire says, instead of presenting a 15- or 20-page Form ADV at the start of a client relationship and annually thereafter, "we've suggested a three- or four-page disclosure form at the time of an engagement, akin to the summary prospectus, and if the client wants more information it can be made available on the advisor's Web site."
Bellaire says a double standard currently exists that in some ways favors RIAs, and that the FSI has been unfairly accused by some trade groups of proposing changes that would water down the fiduciary standard.
"Form ADV requires RIAs to disclose conflicts of interest, but it does not require RIAs to disclose that a guy down the street charges less and has better investment performance," he says. "Yet some critics act as if we are watering down the standard if we do not require B-Ds to sell only their least expensive product. The '40 Act fiduciary standard does not require that an investment advisor only do business with clients where it is the lowest cost and best provider, and it allows the RIA to simply disclose the fact that other RIAs may perform better and charge less."
Bellaire says clients should simply be given full disclosure and then make a decision about what to buy and which advisor to work with. "Sometimes, the lowest cost option is the best one," he says.
"The '40 Act fiduciary standard allows conflicts to exist as long as they are disclosed and a client can make an informed decision," he says. "What we are advocating for is that the same standard of care be applied to B-Ds in a thoughtful way that keeps costs down. We don't want to undermine the standard, but do want to see it get to the point where it operates in the B-D model for benefit of clients."
Bellaire says that the questions of whether to apply a single fiduciary standard or make Finra the self-regulatory body for RIAs are intertwined. "We've been making the point on the Hill that these two items are closely related and we won't be solving one without solving the other," he says.
The FSI is actively lobbying to make Finra the SRO for RIAs, and it wants to see a fiduciary standard adopted that would be favorable to broker/dealers. "We envision a separate entity under Finra's umbrella with its own governance structure, a board with a majority of public members with industry representation," says Bellaire.
Bellaire says the SRO administered by Finra would add to its exam staff individuals with knowledge of the RIA business. "Finra would leverage its existing district structure to perform routine exams of advisors," he says. Bellaire noted that Finra chief Richard Ketchum has said the new Finra entity would not engage in significant rule-making for several years while exams are performed.
"They see that as their primary focus, routine exams," says Bellaire. "And from our perspective, that is essential so that the fiduciary standard RIA advisors are held to is not a hollow promise to investors. Right now, we have investment advisors who tell the public I am held to a higher standard of care and that the way I practice is in your interest, but the truth is, no one ever comes by to verify that's actually happening and that they are living up to their obligations."
Like Schacht, Bellaire believes any movement on these two questions is now unlikely for months. He says the SEC will be tied up for at least a couple of months on studies required under the Dodd-Frank law. And then the drafting of new rules for implementing the fiduciary standard will begin in earnest. In the meantime, Bellaire says one of the SEC commissioners, Kathleen Casey, will reach the end of her term and a new appointee will have to be named and come up to speed on these issues. Also, the commission is split 3 to 2 on the fiduciary standard issue, and commissioners usually do not like to push ahead with rule-making when there's a split.