A new study, funded by organizations that have been vocal advocates for a strict, one-size-fits-all fiduciary standard for financial professionals, purports to refute statements NAIFA has made in encouraging the SEC to be cautious as it drafts a fiduciary duty rule that would affect broker-dealers and the consumers who rely on their services and products.
The study makes some bold claims, but in reality has serious flaws and adds little to the debate over the SEC’s anticipated fiduciary rule.
“The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice,” was written by Michael Finke of Texas Tech University and Thomas Langdon of Roger Williams University and funded by the Committee for the Fiduciary Standard and the Financial Planning Association, among others.
It claims that four states currently mandate that registered representatives of broker-dealers have a fiduciary duty when advising clients, 14 states deny such a fiduciary duty, and 32 states and the District of Columbia have either limited or ambiguous fiduciary duty requirements. The authors compare statistics and survey results from states they label “fiduciary” and “non-fiduciary,” and claim to demonstrate that the fiduciary duty has had little, if any, impact on registered reps, their clients, or moderate-income investors as a whole.
The study’s overarching conclusion is that fiduciary duties imposed on registered representatives in California, Missouri, South Carolina and South Dakota have not resulted in fewer registered reps per capita, have not reduced the access of lower- and middle-income consumers to financial advice and have not limited the ability of advisors to receive commissions or provide a broad range of products.
“These results provide evidence that the industry is likely to operate after the imposition of fiduciary regulation in much the same way it did prior to the proposed change in market conduct standards that currently exist for brokers,” the study authors assure us.
Limitations of the Study
Yet, the entire study appears to rest upon a foundation of sand. The underlying premise, that a common-law fiduciary duty exists for registered reps in four states, is shaky to begin with. The authors make this claim based on a single court decision in each state.
In three of the cases, courts actually ruled in favor of stock brokers accused of wrong doing. The study authors claim the court decisions nonetheless establish common-law fiduciary obligations on advisors because they loosely make reference to the “fiduciary” nature of the defendants’ relationships with their clients. In the fourth case, the court ruled against the defendant on numerous fraud and other criminal charges and similarly merely mentioned fiduciary obligations in its ruling.
None of these cases is remarkable in any way, and the use of the term “fiduciary” had no real significance and no effect on the outcomes. None of the cases creates a nebulous fiduciary duty or a new standard of care.
There are absolutely no laws or regulations establishing a fiduciary duty for registered reps in any of the four states the study labels “fiduciary states.” It’s not surprising that the supposed “fiduciary duty” did not impact consumers or affect the way advisors do business. It’s doubtful whether advisors or consumers in the states actually know about the court decisions.
At least for three of the states, the study cites no cases of advisors found to have violated their alleged fiduciary duties.
Notably, the researchers’ survey did not ask whether registered reps thought they were bound by a fiduciary duty to their clients – in fact, it doesn’t seem to have mentioned the term “fiduciary” at all. It did ask whether they “act in the best interest of clients.” In the so-called “non-fiduciary states,” 96.3 percent affirmed that they do.
It’s Not So Simple
If determining the impact of a fiduciary duty on registered reps and their clients was as simple as this study suggests, the SEC would not be trying to figure it out nearly two years after the passage of Dodd-Frank.
It is farfetched that a vague, common-law fiduciary obligation in several states based on findings in obscure court cases would have the same effects as an SEC regulatory standard. We find it even harder to assess this conclusion, because the SEC has not even proposed its regulation.
NAIFA is not necessarily opposed to a fiduciary duty, but we have concerns that a poorly conceived fiduciary rule with no clear compliance guidelines could increase compliance and liability costs and open advisors to the threat of lawsuits.
That’s why NAIFA encourages the SEC to proceed with its economic analysis, and NAIFA is willing to assist in any way possible.
In the words of NAIFA President Robert Miller, “We’re not afraid of regulation, but it has to be intelligent regulation.”