Articles

Who's A Fiduciary Now?

Last year the DOL proposed a milestone redefinition of fiduciary responsibility under ERISA. The essence of the new rule is to expand the definition of a fiduciary to "more broadly define those persons who render investment advice to plans." Since the department hasn't altered its guidance on this essential topic since 1976, it's not a moment too soon for the regulations to catch up with the changing state of the industry.

As we blogged recently (quoting our legal colleague Fred Reish), the proposal would account for both the sweeping, fundamental changes we've seen in the world of financial services providers, as well as the "reasonable expectations" of plan officials and participants. It's welcome recognition that things have changed on both the supply and demand sides of the market, if you will.

The Retail Side

Now the SEC has floated a similar idea for the retail advisory business. This study, required by the Dodd-Frank Act, recommends extending the current definition of investment advisors' fiduciary duty to broker-dealers as well - and perhaps to other entities down the road.

The proposal has already sparked much argument from dissenting members of the Commission on down. It will no doubt provoke a lively debate, or rather, ramp up an ongoing one. But in trying to apply a consistent standard for everyone who provides financial advice to the public, we believe the recommendation gets two things right.

Other People's Money

First, it brings a little more consistency and clarity to the way money is managed. Given the abysmally low confidence many Americans still have in our industry, we can only hope this offers a small step toward rebuilding public confidence.

The SEC report argues that action is needed "because [retail] investors are unaware that investment advisers and broker dealers operate under different standards." To a well-informed, active investor that distinction may not be terribly relevant. But in our experience of some parts of the 401(k) world, there are investors out there who are unaware that stocks and bonds are different things - until market events provide a sudden and unpleasant education.

When you consider the broadest possible definition of "retail investor," doesn't it make sense to use the most robust, practicable definition of fiduciary responsibility?

Don't get the idea that we're fans of regulation for regulation's sake. Far from it. But are committed to the best interests of individual retirement investors we serve - because it's the right thing to do, and because it's good business. If regulation is appropriate to ensure that those interests are protected, then consistency, the proverbial level playing field, should benefit everyone.

From Relationships to Apps

The second thing the SEC has got right is in recognizing how completely the investment business has changed. Think about it: to make a simple trade a generation ago, you had to call up your broker. This was an actual, living person who knew you personally. You'd probably have a little how-are-the-kids chitchat, get his take on where the market might be headed, then ask about selling some Pan Am and buying U.S. Steel instead. Now you can do it all on a smart phone app.

Sure, we're talking about advice, not simply trading. But thanks to technology the nature and availability of personalized advice have changed just as dramatically. (No, we don't offer a GuidedSavings app - yet.) There's also a firewall between the highly regulated world of retirement plans world and the more freewheeling universe of retail investing.

But as we see it the two have gradually been converging ever since the introduction of 401(k). Which leads us to a bit of a paradox. As responsibility for retirement continues to shift toward the individual, retirement investing will be drawn ever closer by the gravitational pull of financial services convergence. But at the same time, the range of available services will probably become even more complex.

As the services and players continue to converge and diverge, often in mysterious ways, one of the unifying threads is a shared responsibility to the investor. Any reasonable effort to build on that common ground will be welcome.

Is it a good idea to have more consistent rules for all fiduciaries? As always, your comments are welcome.