SEC May Introduce ‘Universal Fiduciary Standard’ Several news outlets have reported the Securities & Exchange Commission (SEC) may introduce a Universal Fiduciary Standard for all financial professional. It’s legislation that would attempt to harmonize the fiduciary duties owed by Registered Investment Advisors (who have a clear fiduciary obligation to their clients under federal law), and stockbrokers (who have a less stringent fiduciary obligation to their client). On the one hand, it could mean more middle-class investors will have a true fiduciary handling their assets. On the other hand, it could undermine and dilute the very concept of what a fiduciary obligation is. What’s a Fiduciary Obligation? If your financial advisor has a fiduciary obligation to you, it means his investment recommendations need to reflect your best interests, financial needs, objectives and goals. Just like your doctor can’t recommend an unneeded surgery to put extra money in his pocket, your investment advisor can’t put his financial interests ahead of yours. In other words, recommending an inferior investment product to you just because it pays a higher commission is not allowed. The thing is, Registered Investment Advisors (RIAs) have a fiduciary obligation to their clients under federal law, but for stockbrokers it’s different. It’s not that stockbrokers don’t have a fiduciary obligation, it’s just that they’re not held to the same high standard as RIAs. But if that’s the case, why would anyone go to a stockbroker? Well, most investment firms require investors to deposit anywhere from $100k to $500k to qualify for RIA services. As a result, middle class investors typically have no choice but to make due with a commission-based stockbroker who doesn’t owe them the same level of fiduciary care. A Universal Fiduciary Standard The SEC’s idea of a Universal Fiduciary Standard would attempt to resolve this problem by defining and equalizing the fiduciary obligations of investment professionals across the board. It means that stockbrokers would be held to the same fiduciary standard as RIAs. This might sound like a good idea because more middle class investors would get true fiduciaries taking care of their retirement savings. However, the Universal Fiduciary Standard proposes to do more than just heighten fiduciary obligation owed by stockbrokers. It will also attempt to codify the broad concept of fiduciary obligation within a set of black and white rules – and this could have negative consequences for investors. Currently, fiduciary obligation is based on common law, which means it’s not clearly defined by rules – and that’s why it’s such a powerful tool for investors and their attorneys trying to bring an action against an investment advisor. As it stands, fiduciary obligation is defined inside the context of a particular case – a morality of ethics to be weighed by skilled stewards of the law on a case by case basis. Attorneys representing the parties have the opportunity to argue the merits of a fiduciary claim. Moreover, the judge or arbitration panel presiding over the case have the freedom to employ their wisdom and consciences in deciding the matter. But a Universal Fiduciary Standard would limit fiduciary obligations by a defined set of rules. It would turn a far reaching legal concept into a series of limitations. This could weaken breach of fiduciary duty claims brought forward by investors. It could also provide loopholes to be exploited by brokerage firms. Because of everything that could be at stake, the SEC’s Universal Fiduciary Standard should be watched closely as it develops.
SEC Contemplates Introducing a Unfiform Fiduciary Standard
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