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Exclusive Comments from Industry Insiders Suggest Fin-Reg’s Fiduciary Standard May Impact 401k Plan Sponsors

June 28
23:14 2010

Last week, the Congressional reconciliation committee unveiled a compromise package for the proposed Financial Reform Act. The bill contains key provisions relating to steps necessary for the adoption of a broad fiduciary standard. While 889853_94815298_Congress_stock_xchng_royalty_free_300the pending law only asks the SEC to study and comment on the issue, many feel this legislation could have a significant impact on the way brokers, financial planners, insurance sales and other financial professionals ply their trade. (For a complete overview of the compromise, see fi360’s article “Fiduciary duty for broker-dealers soon to be in the hands of the SEC” published June 28, 2010.) The implementation of a universal fiduciary standard may require 401k plan sponsors to revisit the vendors currently providing services to their plan and may even cause the removal of some of those providers.

That’s the worst case. Fiduciary News spent a few days speaking with industry leaders. To hear them tell it, this bill may be much ado about nothing – or it just could change the world as we know it.

David G. Tittsworth, Executive Director of the Investment Adviser Association (IAA), a not-for-profit organization representing the interests of SEC-registered investment adviser firms, would have preferred the statutory removal of the current broker exemption from the Investment Advisers Act of 1940. “Senator Dodd had that in his initial bill, but the Senate replaced it with a six-month study. Coming out of the reconciliation committee, the Securities and Exchange Commission (SEC) still has to conduct a study over the next six months, but the compromise changed the wording from ‘the Commission shall’ to ‘the Commission may’ enact rules following study.”

Under the agreement, the SEC is going to conduct a study to evaluate the effectiveness of existing standards, primarily in a retail arena. “Every member of our Association is an Investment Adviser registered with the SEC, and they all are subject to the fiduciary standard,” Tittsworth says. “What we’re talking about is extending the standard to other people doing the essentially the same thing. We think the fiduciary duty under the Investment Advisers Act is appropriate for both the investors as well as the professionals who offer the service.”

Dan Barry, Director of Government Relations of the Financial Planning Association (FPA), said his organization has no official position on the matter. “We represent more than twenty-four thousand members and these individuals have different points of view. I haven’t been able to discern a strong opinion or consensus of opinion.”

Nonetheless, the FPA is on the record of supporting a fiduciary standard. “When Dodd first came out with the bill,” said Barry, “we were part of a group that signed a letter that supported the proposal as an effective way to apply the fiduciary standard to brokers. There is an understanding there could be unintended consequences to any action. It was more about the fiduciary duty than specifically removing the broker exemption.”

Barry does offer some practical implications should the SEC go forward with requiring all professionals offering investment advice to follow a fiduciary standard. “If it’s just about execution, the fiduciary standard won’t come into play. But, if the broker starts getting into advice, that’s where the standard kicks in. Once the SEC makes its rules, I would expect there to be greater clarification to make this clearer.”

Still, Barry can see major changes coming from the adoption of a universal fiduciary standard. “The brokers are going to have to look at how they sell their products. If in the process of making sales transactions, they advise clients to make purchases, they’re going have to change that. You can envision something where there are greater disclosures about commissions, sales of proprietary products or principal transactions, disclosures about conflicts-of-interest, etc… I would expect that any final rules would emphasize greater disclosure, hopefully in simple words customers can understand.”

Tittlesworth remains more sanguine regarding the ultimate endgame. Consistent with this cautious approach, he says, “I think is could have been worse and it could have been better. As a first priority, we simply don’t want to see Congress or the SEC water down the current requirements. Beyond that, we’d like to see a level playing field among professionals providing similar services.”

He is quite clear on the IAA’s next steps. “The battle now shifts from Capitol Hill to the SEC,” said Tittlesworth. “This final agreement represents a compromise. We’re going to continue to support the fiduciary standard in the investment advice arena. We’re going provide the SEC with what they need to support adoption of a universal fiduciary standard. Chairman Shapiro has in the past made comments that broker dealers providing investment advice should be subject to a fiduciary duty. Ultimately, though, we have to wait and see how this study comes out over the next six months and see what happens in the rule making process.”

Roger Wohlner, a financial advisor with Asset Strategy Consultants in Arlington Heights, Illinois and author of Chicago Financial Planner, recently named by the The Wall Street Journal as the top financial blog, best summarizes the view of many investment advisers when he says, “ANYBODY who recommends, sells, or otherwise facilitates a client moving into any investment vehicle owes that client a standard of care at the fiduciary level.  The first consideration should be whether a financial product is in the client’s best interest.  To me, suitability in nonsense. But let me be clear, I am not talking about individuals who are do-it-yourselfers executing trades on their own.  In this case, the TDs, Schwabs, etc. do not, in my opinion, owe this Fiduciary standard of care.”

For the 401k Plan Sponsors, the adoption of a universal fiduciary standard may greatly impact how their plans operate. This will be especially true for plans currently receiving investment services from any entity not presently under a fiduciary standard. The action now moves to the SEC, which is already on record saying it wants to address the long festering 12b-1 issue. It could be the SEC may decide to kill two birds with one stone.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Roger Wohlner
    Roger Wohlner June 29, 19:04

    Chris it will be interesting to see how sponsors working directly with a bundled provider such as one of the fund companies or an insurance company are impacted. Many of these sponsors think that because they use an investment lineup suggested by the plan provider they have somehow acted as a fiduciary and in the best interests of the plan’s participants. Likewise with simply going with the provider’s captive target date funds, they generally have performed no due diligence here either.

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author June 29, 20:27

    What’s worse, some plan sponsors believe merely selecting mutual funds – without an adviser – affords them the protection offered by the various states’ Prudent Investor Laws. But, why pick on plan sponsors alone? It seems most of the investing public doesn’t know the difference between an Investment Adviser (a fiduciary), a broker (an order-taker) and a mutual fund (a security). Now, if you want to throw insurance companies into the mix, we’ll have an interesting stew!

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