New US fiduciary rule talk prompts question of global ‘fiduciary standard’


A new law requiring all US insurance brokers and others who provide retirement planning advice to begin doing so under a legally-binding “fiduciary rule”, like one that already applies to that country’s Registered Investment Advisors, is due to begin to take effect in the United States next April. (The fiduciary rule that covers RIAs has been in place since 1940.)

A fierce debate about whether US president-elect Donald Trump will seek to derail it, though, before it comes into force has sparked a growing international dialogue about whether an internationally-recognised and enforced “fiduciary standard” might be at least one answer to the persistently high global levels of investment product mis-selling.

Although few people outside of financial circles are familiar with the term “fiduciary standard”, it is, thanks to the current US debate, becoming more well known. Major players in the US debate have included Morgan Stanley, Merrill Lynch and Wells Fargo.

Perhaps most importantly in terms of the spread of the idea behind the fiduciary standard is the fact that in 2013, Australia adopted – and has recently begun enforcing – an identical concept, as part of its Future of Financial Advice reforms, although it doesn’t refer to it as a “fiduciary” rule or standard but instead, as “the Best Interest Duty”. Like the US fiduciary rule and internationally-accepted legal definitions of the idea of a “fiduciary”, though, it assigns to Australia’s regulated advisers the requirement to “act in the client’s best interests”.

As reported here last month, Australia has begun to enforce the new standard. In June, the Australian Securities & Investment Commission took its first action against an Australian business under the Best Interests Duty since the introduction of the FoFA reforms, when it began proceedings against a Melbourne-based advisory firm, NSG Services Pty.

A few months later, it banned a Brisbane-based life insurance adviser from providing financial services for a period of five years, for, in ASIC’s words, “fail[ing] to act in his clients’ best interests when providing advice”.

ASIC said it took that action following two years of “surveillance” of the adviser in question that it had carried out, beginning in 2013, “which included a review of a number of his client files from the time he was an authorised representative” of the company he worked for, Affinia.

In a statement, ASIC deputy chairman Peter Kell said consumers “should be confident that their financial adviser is acting in their best interests”, and added: “The business model of simply ‘selling’ life insurance without complying with the legal and regulatory obligations will not be tolerated by ASIC. Advisers who do so will be removed from the industry.”

‘Best interests’ vrs ‘suitability standard’

One point most advisers who are familiar with the idea of a fiduciary standard say is difficult to argue with is the idea that such a rule should be opposed by anyone, since all that it requires is for those selling advice or products to clients to put the interests of those clients “first”, or in other words, ahead of their own. The surprise for clients, they note, is that this could ever not be the case.

In fact, though, among US retirement products brokers at the moment – and thus the issue, for some –the standard that needs to be met is a lower “suitability standard”, which requires only that the product be deemed suitable for the client.

This is also true of some advisers classed as “restricted” advisers in the UK, although commission is banned for all advisers there. The UK regulator applies and enforces legally the term “independent”, which places a higher, “best advice” principle rather than purely a lower “suitability of product”standard.

The UK standards for advice on pension benefits are also high, with only approximately 10 to 15% of advisers currently being qualified to sign off on such advice, and firms being subject to additional checks and “Statement of Professional Standing” requirements.

In the US, the requirement to abide by the higher fiduciary standard has been fiercely opposed by such groups as the US retirement products industry, on grounds that it would burden its companies with unnecessary costs. One retirement products industry organisation, the National Association for Fixed Annuities, actually filed suit in an effort to halt the rule’s implementation.

Those who oppose it say they object to the fact that the fiduciary standard is legally enforceable, thus creating the option for clients to bring costly-to-defend legal cases against advisers whose advice turns out to have been less good than a different course of action might have been, even though the adviser could not have foreseen the way a particular financial market or product would perform relative to others.

In Washington, House Republicans have vowed to renew their fight to dismantle or delay the new rule once Trump has been sworn into office, led by Republican Congresswoman Ann Wagner. To Republicans, the rule is yet another example of “over-regulation” promulgated by Democratic law-makers.

Among those squaring off on the other side is Massachusetts Senator Elizabeth Warren, a Democrat, who took to Facebook to announce her support for the DoL’s new fiduciary rule, and specifically, a campaign being waged in favour of it by Jon Stein, chief executive of a start-up online investment business in New York called Betterment. ““I agree with CEO Stein: undercutting the rule would be bad for working families – and bad for the many businesses who have already complied with the new rule,” Warren wrote on her Facebook page.

Australia’s FoFA experience

If Trump does take an axe to recent regulations aimed at cutting red tape on behalf of financial services businesses, he will be following a lead set in 2014 by Tony Abbott, who was elected prime minister of Australia towards the end of 2013, and promptly set to work un-doing the then-just-enacted FoFA regulations, which are often described in the UK as that country’s answer to the RDR reforms.

In particular, Abbott – responding to the kind of industry pressure now being brought to bear in the US – sought to make it easier for advisers to receive commissions and other so-called “conflicted payments”.

Another example of how regulations enacted in the wake of a financial crisis were subsequently repealed was the US Glass–Steagall Act of 1933, which sought to limit what banks were able to do in terms of areas of business, in the wake of the Great Depression. This was repealed in 1999 by President Clinton, in response to pressure from the marketplace.

Some critics of this repeal later claimed that eliminating Glass–Steagall may have contributed to the global financial crisis of 2008, by enabling banks to engage in risky businesses that they shouldn’t have been in.

Adviser support for global fiduciary standard

Many US advisers, who adhere to the fiduciary rule, strongly support it, and believe it would be a step backwards for the US to derail its introduction into the retirement advice sector.

“Let me be clear: Scaramucci does not speak for real financial advisers,” said one such adviser, in a comment piece posted on a US television news website in October, referring to anti-fiduciary rule comments made during the Trump campaign by hedge fund partner and Donald Trump adviser Anthony Scaramucci.

“Real” financial advisers – for instance, those known as Registered Investment Advisors (RIAs) – already are held by law to a fiduciary standard,” this adviser, Tim Maurer of Buckingham, a Focus Financial Partners-affiliated advisory firm in Charleston, South Carolina, wrote.

“It is only brokers and other advisers who sell financial products for a commission that are clinging to a lesser bar.

“Real financial advisers overwhelmingly support the [US Department of Labor’s] Fiduciary Rule, which only applies to Americans’ retirement accounts.

“While the rule isn’t perfect and contains some loopholes, real financial advisers embrace the wider application of the fiduciary standard, and remain hopeful that the rule will expand further to ensure anyone who receives financial advice on any account or in any capacity is also protected by it.”

Brett Evans, managing director of Queensland, Australia-based Atlas Wealth Management, which looks after expat Australians around the world, says he would “like to see some form of Best Interest Duty – or fiduciary rule – being incorporated by regulators and advisers around the world”.

“As a financial adviser, we should always be working towards the client’s best interests, so this piece of legislation won’t change the advice we’re providing, it just ensures that it gets done by every financial adviser in Australia, or wherever.”

Reality: ‘It could never happen’

James Pearcy-Caldwell, chief executive of Aisa International, says that however appealing it might be to dream of a global fiduciary standard being in force one day, the reality is that it could never happen.

The reason, he says, is that regulators couldn’t enforce such a standard outside of their own geographical boundaries. For example, the UK regulator has no power to enforce its regulations outside of the UK, any more than the US is able to enforce its fiduciary rules anywhere outside of the fifty US states. Even within the EU, he notes, which is supposed to permit cross-border enforcement, the reality falls well short of what is officially intended.

“[Within] the EU, where all regulators are meant to be harmonised under EU financial rules, [the reality is that they] fail to do so consistently, with different laws and a wholesale failure to enforce [them],” he notes.

Meanwhile, such terms as “Independent” and “Chartered”, which are highly-prized in the UK, are not enforceable worldwide and as a result, “often meaningless” elsewhere.

“The only thing to do is to keep all [of a client’s] investment products and investments under the scrutiny of the appropriate home state regulator, who understands and enforces its fiduciary rules under law.

“The moment you let any part of that go, even the use of simple definition terms like ‘independent’, the cat is out of the bag, and so are peoples’ pension investments, too often into unscrupulous fictitious investment schemes overseas.”

This article originally appeared in a interview with International Investment.

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