There’s Only One Fiduciary Standard
Happy New Year! 2010 marks Truepoint’s twenty-year anniversary. Reflecting on this milestone, I am reminded that the firm continues to be guided by the same fiduciary principle that was the basis of its founding.
By eliminating conflicts of interest and aligning compensation structures with client advice and goal achievement, Truepoint is one of the leading independent, fee-only wealth management firms in Cincinnati.
While fee-based compensation structures are gaining favor on Wall Street, operating as a fiduciary is still not the standard in the industry. When it comes to consumer protections, brokerage firms prefer a less rigorous standard which focuses on suitability. This criterion limits providers of products and advice to recommend only those products that are suitable for a client, based on his or her goals and circumstances. It does not prohibit principal trades. If a brokerage firm can sell a bond from its inventory when a client needs fixed income exposure, it’s a lot more profitable for the firm than having to shop the order among other dealers to get the best price.
Currently there is much debate regarding implementation of a broad fiduciary standard.
As of this Viewpoint, the Senate is proposing to govern all advisors under the Investment Advisors Act with the existing fiduciary standard, including repeal of the “Merrill Lynch” rule which permits brokers to give advice without having to comply with the Act’s fiduciary standard. The House bill would not repeal the broker-dealer exemption, but would give the Securities and Exchange Commission (SEC) more power in rule-making to extend the fiduciary standard.
The appropriate response appears clear to me – any individual providing financial advice in any way, shape, or form should be required to put the clients’ interests first. There should be no exclusion or opportunity to opt out. The Investment Advisors Act already establishes a standard negating the need for the SEC to develop additional rule-making and likely bureaucracy.