"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.