Coming soon to a broker-dealer or registered investment advisor office near you--a uniform fiduciary standard of care when providing investment advice to retail clients.

At least that's the recommendation from the 208-page Securities and Exchange Commission study mandated by last summer's Dodd-Frank financial services reform bill and released in late January. The study aimed to tackle the fundamental problem that many investors are confused about the different standards of care that apply to broker-dealers and investment advisors.

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Congress' marching orders to the SEC were twofold: 1) Evaluate the effectiveness of existing legal or regulatory standards of care when providing investment advice to retail customers; 2) 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.

At the end of the day, an SEC task force recommended creating a uniform fiduciary standard for broker-dealers and investment advisors who offer advice about securities to customers. In addition, that standard should jibe with the current standard that applies to investment advisors.

Various industry figures, from the chiefs of the SEC, Finra and Sifma to the heads of leading companies such as LPL Financial and others, are on record favoring some sort of unified standard (though two of the five SEC commissioners took the unusual step of filing a joint statement distancing themselves from-and pointing out the shortcomings of-the staff's recommendations).

At first glance, the SEC report seems like a victory for RIAs and their fiduciary standard that requires advisors to act in their clients' best interests, and a setback for broker-dealers and their current suitability standard requiring them to make recommendations that fit a client's financial situation and risk tolerance.

A report published last August by Financial Research Corp., which looked at the possible impact of Dodd-Frank and a new fiduciary standard on the brokerage industry, said that under new regulatory guidelines the broker-dealers' main defense in arbitration proceedings--i.e., that brokers don't render advice and so aren't accountable for investment recommendations after they are executed--might become a competitive liability as consumers seek advisors who are accountable for their investment recommendations.

The report said if thousands of brokers were to become accountable for millions of investment recommendations to retail investors and they had to manage the liability that comes with offering advice, "the industry would have to look entirely different than it looks today."

Granted, if a uniform standard is ever adopted it would likely mean changes in how broker-dealers do business and entail additional costs. But many firms are already exposed to a fiduciary standard through their corporate RIAs and their dually registered individual advisors.

"We've been operating under a fiduciary standard for some time," says Steve Dowden, president and CEO of Invest Financial Corp., a Tampa Fla.-based independent broker-dealer. "We feel we have the appropriate pieces in place, and for those we don't, we're comfortable we'll be able to meet any of the changes that come out of it."

Additionally, the SEC study says the 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. In essence, the unified standard wouldn't ban product sales and commissions--a staple of the brokerage industry business model and the bane of investment advisor and consumer groups who decry what they say are the inherent conflicts of interest in commission-based sales, and who espouse the purity of the fee-based model. The study also said broker-dealers and RIAs would continue to be subject to all of their existing duties.

So, what exactly does a "uniform" standard mean and what would that look like for broker-dealers? Moreover, is it even possible to craft a unified standard that would please both broker-dealers and RIAs and, more important, better serve its intended audience--the investing public?

So Easy, Yet So Hard
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. End of story.

But U.S. securities officials and the financial services industry have grappled with this concept for decades, and the latest attempt to corral and tame the so-called F-word might prove equally elusive. "The concept of the fiduciary standard has been around almost as long as the law has, but it's not that easy to define," says George Guerra, an attorney in the securities arbitration practice at Wiand Guerra King in Tampa. "All we have is the SEC report and the notion there ought to be one standard that uniformly applies to broker-dealers and investment advisors. Easy to say, but really, really difficult to develop and put in place."

For example, Guerra says, charging a commission isn't in and of itself a fiduciary violation of acting in a customer's best interest. "The hard part becomes how do you draw the line."

Given that, there's much room for dickering on the final shape and scope of a uniform standard. So expect lots and lots of debate in coming months and--most likely--years.

Most people interviewed for this story don't expect a resolution for at least a couple of years. Even SEC Chairwoman Mary Schapiro, in an early-February speech, indicated the agency isn't working at breakneck speed to nail down the specs of a uniform standard proposal.

In fact, Dodd-Frank mandated only that the SEC conduct the study. Subsequent rule making is optional. And if the agency did decide to do rulemaking on a uniform standard, its staff would propose recommendations, to be followed by an open meeting and then a public commentary period (and intense lobbying by industry groups). After that, the five commissioners would vote on whether to adopt the recommendations.

That's why some people are downright bearish on the prospects of a universal standard becoming reality. "We'll never see a uniform fiduciary standard, but I'm convinced we'll see a change in the fiduciary landscape," says Lou Harvey, president and CEO of Dalbar Inc,. a Boston-based financial services industry market research firm. "I think the world will be divided into those clients and activities that are fiduciary in nature and those that are not."

If so, that could be complicated for some broker-dealers, depending on their business model. "What happens with insurance companies who formed their own broker-dealers to sell their own products?" Harvey asks. "Insurance companies will turn themselves into pretzels to avoid crossing the fiduciary line."

Not so, says John Brett, senior vice president of MetLife's broker-dealer group who oversees a network of roughly 10,000 reps working either through two independent broker-dealers-Walnut Street Securities (predominately single-person shops) and Tower Square Securities (mainly larger office groups)-or through two entities structured like national wirehouses, MetLife Securities and New England Securities.

"We do a lot of work in the annuity and life insurance space," he says. "Once you're a fiduciary, you better be prepared to provide the holistic approach when servicing the client's needs."

Many fee-only RIAs view commission-laden products such as annuities and life insurance with disdain. Brett believes that's a disservice to a client's best needs. "An RIA who has built their practice around a planning process that looks at any commission as being against the clients' needs," he says, ignores beneficial holistic-based planning approaches offered by products such as annuities and life insurance. "Trying to exclude a piece of the clients' needs because you have a distribution model that you're biased toward I think is part of the challenge we face as an industry."

Securities lawyers, consultants and broker-dealers themselves anticipate a universal standard could mean more costs, regulation, enforcement and litigation for broker-dealers, particularly involving disclosures.

"I think the regulators are looking at a uniform standard that requires putting the client's best interests first at the time the provider is offering services to the investor," says Marshall Levin, a partner at the consulting firm Beacon Strategies LLC.

"Advisors continually provide advice while the rep's advice is episodic. The best way to achieve fiduciary parity is through full disclosure [for B-D reps] along the lines of Rule 2330." (This Finra rule sets guidelines for disclosure and suitability requirements for deferred variable annuity sales.)

Disclosure--and more of it--is often seen as the solution to ameliorating conflicts of interest that cloud the advisor-client relationship. The problem with that, say experts from the likes of Yale and the University of Texas who've studied the issue, is that too much disclosure can overwhelm investors with information that is often beyond their ability to meaningfully comprehend.

Furthermore, some academic studies found that when a group of professionals (in this case, brokers) disclosed a conflict of interest to their clients (i.e., they get paid by what investment they put the client in, and sometimes they can benefit financially from promoting a stock or other investment versus giving unbiased advice), it can give brokers the moral license to provide even more biased advice.

Those findings might paint an overly cynical picture, but it speaks to the problem of relying on disclosure as part of the solution to forging a uniform fiduciary standard that works in a customer's best interest.

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 is "solely incidental" to their business and their pay is 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, prompting calls for a uniform standard. The Financial Services Institute, an independent broker-dealer trade group, argues that the '40 Act definition of a fiduciary isn't appropriate for all clients. FSI says it's comfortable with a universal standard of care that's crafted in a way that allows its members to serve Main Street investors.

Many of its members agree. "If you apply the '40 Act definition, it'll make it uneconomic to serve smaller clients," says Valerie Brown, CEO of Cetera Financial Group, an El Segundo, Calif.-based independent broker-dealer. "That's not in the best interests of this country, particularly with the retirement crisis we're seeing."

Brown says the commission system works very well for middle-income folks who buy and hold, and that it's an inexpensive way for them to maintain an account and get investment information and education. Otherwise, they don't have enough assets to qualify for fee-based accounts that generally require sizable investment minimums to be economically feasible for the advisor to service. "If you compare the fiduciary and suitability sides of the business, the average client on the suitability side is smaller," she says. "Because of that, their portfolios aren't as complex and don't have as varied a product range, and there's not as much documentation for the basis of every recommendation as there is on the advisory side."

Brown believes a universal fiduciary standard will require more training and documentation on the part of broker-dealers. Others agree. "I think the biggest impact [of a uniform standard] will be in a shift toward documenting your process versus documenting recommendations," says Jason Thackeray, associate compliance director and RIA chief compliance officer at Raymond James Financial Services in Tampa. "The heart of the fiduciary standard is having a process in place where you can show not only how you arrived at a recommendation or how you arrived at a strategy for a client, but how that strategy was in their best interest."

In Cetera's case, Brown says the company partnered with PIE Technologies to develop a version of MoneyGuide Pro called MoneyGuide Broker, which is specifically for non-IARs. The tool allows them to do asset allocation and think about eventual cash needs as clients retire, and to put together what resembles a financial plan for clients even within the brokerage context.

She says it's an in-depth tool that's appropriate for larger clients, but they'll need to add another version that's more appropriate for smaller clients with, say, $25,000 to invest. "It'll be expensive for those [other broker-dealers] who don't have such a system in place, and still will be for us because we'll have to train advisors with smaller clients on how to use that tool to help them document their process to conform to the new rules," Brown says.

The second overarching reason for the SEC study--evaluating whether there are legal or regulatory gaps needing to be plugged by rule or statute--led the agency's staff to conclude that a harmonization of regulations would provide similar consumer protections whether investors are dealing with broker-dealers or RIAs.

According to the study, the functions that should be harmonized include advertising and other communications, supervision, the licensing and registration of firms, continuing education requirements, and books and records. The study acknowledged this could boost costs for broker-dealers, RIAs and investors.

"The harmonization aspect highlights the fact that B-Ds and RIAs, as much as they'd like to remain distinct and different from each other, are likely to come closer together with a much closer alignment when it comes to oversight and audits and in the disclosures we provide consumers," says Invest Financial's Steve Dowden.

Many observers say harmonization plays to the advantage of broker-dealers, who operate under more regulations than investment advisors. "I think the biggest impact will be on RIAs, who today are subject only to mild regulations," says Dalbar's Lou Harvey. "Broker-dealers are used to books and records and supervision, which the RIAs are not. The free ride will be over for the RIAs."

Even if the SEC manages to craft a wonderful uniform fiduciary standard pertaining to securities advice, there still won't be an overall uniform standard because 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 ruffled a lot of broker-dealer feathers with its recent proposal to expand its definition of fiduciary. That would entail replacing its current five-part test in favor of placing the fiduciary tag on anyone who renders advice to a retirement plan or participant for a fee, or who provides advice or recommendations on the management of securities.

The ERISA fiduciary standard is considered more stringent than the '40 Act standard, and if the recent DOL proposal is enacted, it would expand the ERISA standard beyond pension plans and 401(k)s and into the realm of IRAs. Among other things, it would prohibit broker-dealers from receiving commissions or from charging 12(b)-1 fees on IRAs.

What needs to happen, say observers, is for the DOL and SEC to get together, look at their controlling statutes, and try to construct a single standard that suits both agencies. It would mean the DOL would have to meet somewhere in the middle.

"There was a perception that the DOL would yield to the SEC on the uniform standard and somehow get IRAs out of its tougher regime," says Kent Mason, retirement plan attorney with Davis & Harman LLP in Washington, D.C., whose clients include broker-dealer firms. "And I think the hearing the DOL had this week [early March] indicated that it's not going to happen. The level of concern among broker-dealers has gone up as a result. I just talked to one company who said they couldn't change their model within a reasonable time period, so they would essentially have to stop servicing IRAs."

Mason says unless ERISA gets involved, there won't be a uniform fiduciary standard across both securities and retirement plans. And that could complicate things for reps with clients who have both a brokerage account and an IRA. "They would have two totally separate conversations about the two accounts because those two conversations would be subject to two different standards--one under securities rules, the other under ERISA rules," he says. "That means you can't talk about investing that IRA, because in many cases that would break the law."

And so the debate on a uniform fiduciary standard rages on with no clear resolution in sight.