Will Investors Benefit from a Unified Fiduciary Rule?

The Department of Labor’s proposed rule holding brokers and registered investment advisers to a higher fiduciary standard isn’t the slam dunk that many claim.


It’s essential and appealing to boil complex ideas down to their simplest elements. Institutional Investor itself has long aimed to do that. If people can’t easily understand the ins and outs of an investing idea, a proposed regulation or a piece of legislation, how can they be comfortable putting money into a fund or supporting a new rule?

Although every concept can be simplified, I think it’s also essential that reporters and readers take the time to fully understand the nuances behind a story. Take the Department of Labor’s proposed fiduciary rule. President Barack Obama has endorsed the revamped standard, saying he wants brokers to be held to a higher level of responsibility than they are today. Brokers, he says, should put their clients’ interests ahead of their own. Now, who could disagree with that? Framed that way, it’s not a question of “If”; it’s a question of “Why not years ago?” But whereas it’s easy, and even a little fun, to slam Wall Street these days, here’s why the populist argument may be too simple.

When I met Rick Hough, who sits on the board of the Investment Adviser Association, which represents about 500 registered investment advisers, he gave me his point of view on the subject. Hough is also CEO of Silvercrest Asset Management, a $18.2 billion RIA that went public in June 2013. He argues that there is a need to clarify advisers’ and brokers’ duties to clients. “There is substantial reason to be concerned on behalf of investors,” he explains. “Who is acting as a fiduciary, and who is not?” But Hough stresses that one unified fiduciary standard is not the best way to do it.

Here’s an abridged history of the confusion around advisers’ responsibilities to clients. A couple of decades ago, if you worked for a brokerage firm, you were called a stockbroker. Unlike RIAs, stockbrokers weren’t subject to the fiduciary standard. They were salespeople paid by commission and had to make sure an investment was suitable for a client, a lower standard. But the stockbroking business was going in a different direction. Clients were increasingly skeptical of commission-based transactions and instead were willing to pay fees based on the size of their portfolios. In return, they got retirement and other financial advice. Competition from RIAs started growing. To get in on the trend, brokers started calling themselves financial or wealth advisers or even private client advisers. The Securities and Exchange Commission didn’t call this language into question and missed its opportunity in those years to clarify the difference between a broker and an RIA. Brokers could be using higher-fee, in-house mutual funds, for instance, or using their own firms’ fixed-income desks to trade securities like municipal bonds.

There are two possible problems with one uniform standard. First, one rule may require a redefinition of “fiduciary” to accommodate how brokers and salespeople operate. “That could water down the meaning,” says Hough. Mary Jo White, head of the SEC, herself has been fairly skeptical at times of a uniform standard for this very reason. “If you’re a salesperson, you can’t act as a fiduciary. There’s nothing wrong with a salesperson, but do you have a fiduciary duty to the person you are selling to?” Hough believes that the brokerage industry has much more muscle in Washington, so any uniform standard would more likely accommodate the way brokers, rather than RIAs, do business. If the rule gets watered down, investors clearly won’t benefit.

Second, RIAs work according to broad principles, whereas brokers work under very specific rules. Any attempt to level the playing field will naturally move toward more easily understood rules. “I don’t think rules are as protective as principles,” says Hough. “And eliminating those could weaken the obligations that RIAs now have to clients.”


As an alternative, why not have brokers choose whether they want to be an adviser subject to the fiduciary rule or be a salesperson? Adhere to existing RIA rules and be registered with the SEC, or choose to be a broker who is compensated differently. In either case, professionals who advise people on their money would have to be very clear about how they work with clients.

There is widespread confusion about the responsibilities of financial professionals to investors. And clients bear their own share of the responsibility. They refuse to read disclosures that they get from their advisers and brokers. Well aware of this, regulators are aiming to simplify the whole mess. But that doesn’t seem reason enough to adopt a new, unified rule. Simplification in this case may not benefit investors.