Views on the integrity of global capital markets
10 March 2015

Fiduciary Duty Debate: Salespeople Are Not Investment “Advisers”

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With the recent announcement that the US Department of Labor would amend the definition of fiduciary under the Employee Retirement Income Security Act, the hotly contested debate over a uniform fiduciary duty for providing personalized investment advice is heating up once again. That’s because the Labor Department is expected to require many individuals who provide financial advice to put the interests of their clients first when advising retirement plan participants and IRA account holders. Not surprisingly, the issue of which investment service providers owe a fiduciary duty and when has fueled commentary from industry insiders and politicians alike in the aftermath of the Labor Department announcement.

Although the Department of Labor proposal has taken center stage, the Securities and Exchange Commission (SEC) was given a mandate under the Dodd-Frank Act of 2010 to study the issue and the option to issue new rules, with the provision that any such rules accommodate a commission-based fee model. While the SEC did study the matter, several times in fact, the legal complexity of the issue, together with intense lobbying from those with significant commercial interests on the line, has kept the issue and the SEC rummaging for a solution. Delay is almost standard operating procedure in Washington, DC, and there are many who love the political uncertainty of “who moves first” as a tactic to stop fiduciary duty dead in its tracks. In our view, we care less about who gets it done because it is long overdue.

In the meantime, investors have been blissfully ignorant. The reality is that most investors don’t understand or even care about the debate. The difference between fiduciary duty owed by an adviser versus a suitability standard of care owed by a salesperson (typically their broker) is, in a word, boring. If they only realized it means everything in terms of how they are ultimately treated and their rights in the event something blows up with their investment savings. Yet the level of investor inattention was confirmed in a 2008 study commissioned by the SEC (the “RAND Study”), which found that the typical retail investor was completely confused over the titles and duties of their financial services providers.

The only way to fairly remedy the matter is to draw clear distinctions for service providers on the two standards of care. Simply put, eliminate the fuzziness around “personal investment advice” while permitting different business models and service levels. That means there is ample room in this investment profession for both a salesperson model, (i.e., broker-dealer) and the fiduciary adviser model requiring one to act with prudence, loyalty, and care. The tipping point on duty of care, quite simply, is whether you hold yourself out as a financial adviser and are offering advice to guide personal investment choices. It is not rocket science.

We have quibbled for decades about this and now we have statistics that quantify the cost of this quibbling to the average investor. According to a new report released by the Council of Economic Advisers, an estimated $1.7 trillion of IRA assets are invested in products that “generally provide payments that generate conflicts of interest.” The report estimates the aggregate annual cost of conflicted advice is about $17 billion each year. As an industry, we ought to be ashamed.

If you are selling investment products and disclose your conflicts, and you are transparent that you are not acting solely for the benefit of the customer and that you are not their personal investment adviser, that’s fine. But for the sake of everyone associated with finance, stop holding yourself out as someone’s personal financial adviser because you are not — you are a salesperson. Unfortunately, due to hopelessly confused regulatory and legal interpretations, salespersons have become comfortable that they can offer much of the same service as registered investment advisers.

We can do this the easy way, or we can do this the hard way. The easy way in the United States is to merely amend and clarify the language in the existing Investment Advisers Act of 1940 to require anyone providing personalized investment advice to register and become a genuine fiduciary under the 1940 Act. No exceptions or convoluted regulatory interpretations. The hard way is to stumble around for another decade, coming up with endless variations on what constitutes advice (seriously?) or try to create a new standard of care that somehow blends the concepts of fiduciary duty and a salesperson’s duty. In our view, and under our CFA Institute Code of Ethics and Standards of Professional Conduct, you are either giving “client-first,” unconflicted advice, or you are not. Whether the Labor Department, the SEC, or both, let’s get on with it. And that goes for any market in the world.


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Photo credit: shutterstock.com/Rena Schild

About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is managing director of the Standards and Financial Market Integrity division at CFA Institute, where he oversees all advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

5 thoughts on “Fiduciary Duty Debate: Salespeople Are Not Investment “Advisers””

  1. Jesse D. Gossett, JD, CFA, CFP says:

    Kurt, I couldn’t agree more. The only purpose of this debate is to obfuscate and delay. It’s no wonder investors are so confused. I would take your proposal one step further. I would amend the ’40 Act to state anyone dealing as an intermediary is deemed and adviser & fiduciary unless he/she qualifies for an exemption (e.g., fills customers’ unsolicited orders). The facts of this exemption would need to be explained to the customer at account opening and on confirmations.

  2. Kurt Schacht, JD, CFA says:

    Thank you Jesse.
    Politics can goof up darn near anything, regardless of how easy the fix is.

  3. Mac Mekawi, CFA, CFP says:

    It takes a lawyers years and years of studying and testing to qualify.
    It takes an accountant years and years to call himself an accountant.
    It takes a doctors YEARS and YEARs to be an MD,
    yet it takes a person a 3 months course to call himself a financial advisor.
    This is the real problem here.

  4. Jack Waymire says:

    Hi Kurt: Excellent article. Paladin Research does several investor surveys per year. One area of confusion is real advisors provide advice and sales people make recommendations. Not one investor in any survey knew the critical difference between advice (RIA, IAR, fiduciary standard, fee) and recommendations (Series 6 or 7, suitability, commission). They need protection because in the real world there is no difference. Sales people claim to be financial advisors and they make sales recommendations sound like advice. They should be held to the same ethical standard as real advisors.

  5. John Whaley says:

    The vast majority of salespeople in our industry don’t know what they don’t know. Passing the Series 7 makes them experts, and their employers tell them so.

    The post is right on – “If you are selling investment products and disclose your conflicts, and you are transparent that you are not acting solely for the benefit of the customer and that you are not their personal investment adviser, that’s fine.”

    The lobbying money is huge, unfortunately, so I do not expect significant changes. But those of us who accept the fiduciary role and take it seriously need to continue to highlight the differences.

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