Views on improving the integrity of global capital markets
20 April 2015

Fiduciary Faceoff: America’s Investment Industry at Critical Juncture


Our financial services industry is at a crossroads. We have reached that inevitable point where we have to decide which is more important: the interests of our clients or our own narrow self-interests. If we choose the former, I believe, and our global organization believes, we could be on the cusp of a bright future, where investor trust is restored with all the resulting benefits. If we choose the latter, however, I fear trust will only worsen, the regulatory leash around the industry’s neck will tighten ever further, and economic growth will slow.

The United States has reached this point in part due to proposals made by the Department of Labor (DOL) with regard to broker assistance on self-directed retirement accounts. The rules would remove some of the more pernicious exemptions that salespersons have used to get around the fiduciary duty requirements of the Employee Retirement Income Security Act of 1975 (ERISA), and broaden the sweep of individuals and firms required to put the interests of clients first.

The technical aspects of these proposals are significant, and not all to our liking. But the DOL proposals amount to an enormous shove for the industry that is in the right direction. So, too, we hope that the DOL’s action will spur the Securities and Exchange Commission (SEC) to act in concert. Historically, we have supported the Commission as first mover on rules for brokers giving advice and whether a fiduciary duty is owed to a client. Unfortunately, despite specific direction from the Dodd-Frank Act urging the Commission to address the issue, it has not advanced.

What is needed is a clear and consistent fiduciary duty for anyone providing personalized investment advice to clients. In our view, brokers are salespeople. Too often they pretend to be trusted financial and investment advisers. Simply put, if they wish to call themselves advisers and provide advice, then they must be bound by the higher, fiduciary standard of care mandated by the Investment Advisers Act of 1940. No problem if you want to be salespersons, but stop leading customers and clients into believing you are their trusted, personal investment adviser, putting their interests first.

As an organization, CFA Institute has conveyed the message about the need to put clients’ interests ahead of ours, dating back decades. Sadly, the vested self-interests of many financial practitioners have increasingly held sway over the years.

While we have no illusions that the DOL’s word is the last on this issue, we applaud their launching a serious proposal. The process will no doubt prove messy as there are lots of interests aligned to combat proposals like this. Nevertheless, this is a start toward a future in which investors will be better and more fairly served by the people helping them with their investment decisions. For that, we all should be grateful.

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Image Credit: shutterstock/Rena Schild

About the Author(s)
Paul Smith, CFA

Paul Smith, CFA, is the founder of SustainFinance and the former president and CEO of CFA Institute. He has more than 25 years of relevant financial services leadership experience in many aspects of the investment management industry.

3 thoughts on “Fiduciary Faceoff: America’s Investment Industry at Critical Juncture”

  1. John Whaley says:

    Paul, a great analysis of the crossroads we face. In the perfect world, industry self-regulation would solve the issue of salespeople calling themselves financial advisers while selling products. Unfortunately, there is too much money to be made by exploiting the public’s inability to understand the difference.

    1. Paul Smith, CFA says:

      Many thanks for your engagement. Vested interests are indeed the problem. This will not end well. Eventually under public pressure regulators will be forced to act and to overreact. If the industry can’t see past its own immediate self interest it will fail to build a sustainable long-term future.
      Kind regards,

  2. Savio Cardozo says:

    Hello Paul
    Thank you for the well written advocacy on behalf of our clients which we should all espouse.
    However, not to worry.
    If we do not get our act together and focus on what is critical to building long term relationships with our clients – trust, technology will disintermediate us faster than regulation and watchdogs will.
    Thanks again and best wishes

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