Congress May Fail to Create Fiduciary Standard

For months I have watching the Senate Banking Committee and the House Financial Services Committee grapple with whether or not to impose a fiduciary duty of care on anyone offering advice on investments.

In case you are not aware, the fiduciary standard requires advisors to act in the best interest of another party. You may be thinking, “But aren’t all investment advisors required to do this?” No, they are not.

Currently, advisors inside banks, credit unions, insurance companies, and brokerage firms are only required to do that which “suitable” for the client. Under this standard, the advisor must recommend only those products that are suitable based on the client’s situation. This is a lower level of care and it has resulted in consumers being sold products and services that, while perhaps suitable, are not in their best interest.

As you might image, the companies that manufacture and distribute financial products are resistant to the idea of holding their advisors to a level of care that would likely result in a reduction in the sale of their financial products. The advisor inside a national bank, the agent for a major life insurance company, the broker for a major wire house would all be required to make only those recommendations and sell only those products that were in the client’s best interest.

The only advisors who are currently held to a fiduciary level of care are those who act under the Investment Advisers Act of 1940, those who carry the CERTIFIED FINANCIAL PLANNER (CFP) designation and those who operate in the retirement plan arena under the Employee Retirement Income Security Act of 1974 (ERISA). I am a CFP and Cascade Wealth Management is a Registered Investment Advisor acting under the 1940 Act.

The Certified Financial Planner Board of Standards, the National Association of Personal Financial Advisors (NAPFA) and the Financial Planning Association (FPA) formed the Financial Planning Coalition (www.financialplanningcoalition.com). The coalition’s mission is to ensure that financial planning services are delivered to the public with fiduciary accountability and transparency. I am a member of the NAPFA and the FPA.

It does not appear that Congress is going to find the courage to implement the fiduciary standard in the investment industry. The true losers are Americans who should be served only by those acting in a fiduciary capacity.