It seems like the debate over a fiduciary standard of care has been one of the financial advisor industry's most nettlesome issues for eons. Who should it apply to? How do we craft a uniform standard of care that pleases all sides? And, fundamentally speaking, what exactly does "fiduciary" mean?

Of late, the debate has been reduced to a "best interests" issue between investment advisors who are governed by a fiduciary standard of care that places their clients' interests first and broker-dealers who aren't governed by a fiduciary standard and thus, by implication, aren't perceived as required to put their clients' interests first. The latter camp is miffed by that perception, arguing that their advisors often act as fiduciaries even if they're not formally held to that standard.

But according to a new survey of 500 registered investment advisors, investment advisory representatives and registered reps, many advisors of all stripes aren't as fiduciary as they think they are. The study is a partnership between Financial Advisor magazine, Boston Research Group and 3ethos, a Mystic, Conn.-based entity dedicated to fiduciary training that's run by Don Trone, a longtime leader in promulgating fiduciary standards within the industry.

The survey graded advisors based on questions dealing with fiduciary best practices, along with additional questions focused on legal and procedural aspects related to fiduciary services.

The answers were tabulated on a fiduciary best practices index, and were assigned scores and accompanying letter grades ranging from "A" to "F." The average, industrywide index score among all respondents was 76, or a "C" letter grade. The mean score was 78, or a "C+" grade.

Among the questions respondents were asked was whether they acknowledged fiduciary responsibility in writing. Of the advisors who say they acknowledge a fiduciary status for all clients, 35% got a "C" or less for their overall fiduciary index grade. Of the advisors who say they acknowledge fiduciary status for some clients, 68% got a "C" or less. And of the advisors (brokers) who say they do not acknowledge fiduciary status, 90% got a "C" or less.

"There's a disconnect between principles and practices," says Trone, noting the survey reveals that a number of advisors believe they're acting in principle to a fiduciary standard but in reality don't understand the practices.

The survey divided respondents by registration status and graded each of the four different groups. RIAs regulated by the Securities and Exchange Commission collectively scored an 83 on the index, or a "B" grade, while RIAs regulated by the states had a 79 score and a "C+" grade. Dually registered IARs scored 75 with a "C" grade, while registered reps scored 66 and earned a "D."

"I'm a 25-year veteran of the fiduciary movement, and after the work I've done with the financial advisor industry I thought that we were further along [on the fiduciary issue]," Trone says.

This is the first annual survey on fiduciary matters conducted by the three partner entities. The purpose of the survey is to benchmark how well advisors understand fiduciary principles and adhere to fiduciary practices and how that can impact their business. With that information in hand, future surveys will measure the rate of adoption of best practices.

"This will be extremely valuable information when the SEC finally gets around to promulgating a uniform fiduciary standard of conduct," Trone says. "We will actually be able to measure the impact the new regulations have on the industry."

Defining 'Fiduciary'
A fiduciary duty entails a relationship where one person or entity holds something in trust--such as money or other assets--in the beneficiary's best interest. The concept's roots go back centuries, and it seems straightforward enough. Namely, put your client's interests ahead of your own.

But U.S. securities officials and the financial services industry have struggled with this concept for decades, and that includes current efforts to address the matter under the Dodd-Frank financial services reform legislation from two years ago.

As part of that sweeping reform package, the SEC was told to study the current regulatory standards of care for providing investment advice to retail customers. An SEC task force recommended creating a uniform fiduciary standard for broker-dealers and investment advisors who offer advice about securities to customers, and further recommended that the standard should jibe with the current standard that applies to investment advisors.

Broker-dealers are mainly regulated under the Securities Exchange Act of 1934, and investment advisors under the Investment Advisers Act of 1940. The fiduciary standard of care concept, which requires advisors to act in their clients' best interests, was embedded in the Advisers Act and subsequently upheld in the 1963 Supreme Court decision SEC v. Capital Gains Research Bureau.

Broker-dealers weren't included in the Advisers Act because investment advice was deemed "solely incidental" to their business and their pay was based on product commissions, not advice-related fees. Thus, they're held to the suitability standard.

But the differences between the two camps have become increasingly blurred, and fees now represent a much larger share of most advisors' income, prompting calls for a uniform standard. (More on that later.)

Meanwhile, the questions on the fiduciary survey were vetted by a dozen individuals from a broad spectrum of interests that included consultants and voices from the broker-dealer and investment advisor communities.

The 16 questions that centered on fiduciary best practices covered a host of issues, such as whether advisors aligned their investment process to avoid conflicts of interest, and if they put investment options through a due diligence process. "All of these practices are a synthesis of fiduciary legislation, regulations and case law," Trone says. "There's nothing arbitrary about that list."

Best Practices
One of the survey's aims was to examine the relationship between fiduciary best practices and successful advisory businesses. It defined successful advisory firms using quantitative measures such as assets under management, minimum account size and number of clients.

The results found a correlation between fiduciary best practices and both assets under management and minimum account size.

Respondents in the top quartile of AUM (at least $150.1 million) scored best on the fiduciary index, with a score of 85. The second quartile (between $50.1 million and $150 million) scored an 81, while the lower two quartiles ($20.1 million to $50 million, and $20 million or less) scored 76 and 73, respectively.

A similar pattern existed regarding minimum account sizes, where the four categories range from more than $1.1 million to less than $50,000, and the scores were highest in the top two quartiles.

"Elevating the standard of care that the advisor is providing to the client deepens the relationship," Trone says, "and the advisor ends up managing a larger portion of the client's assets as well as lengthening the client relationship."

The survey didn't find much correlation between fiduciary scores and the number of clients reported by survey respondents.

Practice Areas
The survey categorized advisors by how they described their practice area--wealth managers versus retirement advisors versus financial planner--to get a sense of how these areas compared with each other.

That's relevant considering that the U.S. Department of Labor operates its own fiduciary standard for retirement plans under the Employee Retirement Income Security Act of 1974 (Erisa). The DOL's Erisa fiduciary standard is considered more stringent than the fiduciary standard for providing investment advice as spelled out in the Investment Advisers Act of 1940.

Advisors who described themselves as wealth managers scored an 80 on the index. That compares with a score of 76 for those who identified themselves solely as retirement advisors and a score of 72 for those who called themselves financial planners.

"I expected to see that the average fiduciary best practices index of retirement advisors to be significantly higher than that of wealth managers and financial planners," Trone says. He adds he's also surprised financial planners didn't score better on the survey index.

But Michele Warholic, managing director of examinations, education and talent at the Certified Financial Planner Board of Standards Inc., notes that the survey doesn't distinguish between the general definition of "financial planner" and professionals who've earned the CFP designation.

"We'd expect the result to be different if it was limited to CFP professionals," she says.

Nonetheless, the survey found that advisors with a mixed client base--i.e., foundation and endowment accounts thrown into the mix, or when planners added wealth management or wealth managers added retirement planning to their repertoire--scored higher.

"I think that's because people who work with a mixed client base have a well-defined process that they apply no matter which client they serve," Trone says, "and that lines up with a fiduciary standard."

Indeed, survey respondents who said they have a defined investment process scored an 81 on the index, while those who said they have a defined process for some clients scored only 66 and those who have no investment process scored a 49.

The Future Of Fiduciary
The 208-page SEC study mandated by the Dodd-Frank Act attempted to address the basic problem that many investors are confused about the different standards of care that apply to broker-dealers and investment advisors.

Congress told the SEC to evaluate the effectiveness of existing legal or regulatory standards of care when providing investment advice to retail customers, and to determine if there are any legal or regulatory gaps, shortcomings or overlaps pertaining to standards of care that should be addressed by rule or statute.

The SEC's study, which was released in January 2011, recommended applying a uniform fiduciary standard of care for both investment advisors and broker-dealers. The top officials at the SEC, the Financial Industry Regulatory Authority and the Securities Industry and Financial Markets Association--along with leaders at various broker-dealer companies--have publicly supported a uniform standard.

The SEC study says a new uniform standard should be flexible and accommodate different existing business models, fee structures and account models, and it shouldn't decrease investors' access to existing products or services.

But as the old saw goes, the devil is in the details. Industry officials have been lobbying Congress and the SEC with their two cents about what they think a uniform standard should look like.

"We support a uniform standard of care, but it needs to be carefully adopted and adapted to the different business models of broker-dealers and investment advisors," says David Bellaire, general counsel and director of government affairs at the Financial Services Institute (FSI), a trade group for independent broker-dealers.

In particular, he notes, FSI is concerned that potentially excessive compliance demands incurred by broker-dealers to adhere to a uniform standard would boost their costs and could make it uneconomical for them to serve smaller retail clients who don't meet the heftier asset minimums that many investment advisors require.

Where the issue goes next is in the hands of the SEC. Bellaire says he's been told by SEC staff members that the agency has many items on its plate and that the fiduciary standard of care issue isn't exactly its most pressing issue.

"It doesn't appear to be on the fast track there," Bellaire says. He notes that it's his understanding that the SEC is preparing for a request for information to study the economic impact of a uniform standard, which the agency would have to digest before developing a rule proposal that would go out for comment. And all of that is a long process.

"I'm not sure we'll see a final rule in 2013," Bellaire says. "I think it's a long-term project with the SEC."

An SEC spokesman said nothing is imminent on the uniform standard of care issue. In fact, there's no guarantee anything will come of the issue at all because Dodd-Frank mandated only that the SEC conduct the study--any subsequent rule-making is optional.

Watered Down Better Than High And Dry?
Some folks in the investment advisor community fear a uniform standard of care will dilute the fiduciary standard they currently abide by. "Some people are worried about a watered down version," says Paul Auslander, president of the Financial Planning Association. "I think a watered down version is better than nothing."

To Auslander, creating a fiduciary standard across the board would "raise the bar for the profession."

Don Trone, for his part, believes the consensus needed to achieve a uniform fiduciary standard will result in a weakened standard. But that could lay the groundwork for tougher standards down the road. "The courts who hear the first breach-of-fiduciary cases might enact higher standards than what's defined by the regulators," he says.

Clearly, the fiduciary standard of care issue won't be resolved anytime soon. Meanwhile, the best practices detailed in the fiduciary survey taken by 500 advisors are a prescription for putting clients' best interests first whether or not a uniform standard of care is adopted by regulators.

That's a point raised by Sean Walters, executive director and CEO of the Investment Management Consultants Association, an education provider and certification body whose members include asset managers, full-serve brokerages and independent financial advisors.

"Most of the [best practices] items on the survey are either part of our curriculum or part of our professional code of responsibility," he says. "Our members are putting their clients' interests first, and that's their primary focus."