Legislators finally reached a compromise on the fiduciary standard bill late last week after intense last-minute wrangling over its contents.

While the House version pushed for the Securities and Exchange Commission to create a fiduciary standard, the Senate preferred instead to have the SEC study differences between its fiduciary standard and the suitability standard many brokers are held to by Financial Industry Regulatory Authority, without giving the SEC the power to do anything about it.

The final bill contained elements of both: the SEC is charged with studying differences in fiduciary and suitability standards over the next six months, and then to potentially create rules that fill any gaps, although the language of the bill doesn't make this mandatory.

Currently, registered investment advisers are held to a fiduciary standard under the Investment Advisers Act of 1940. Investment advisers who hold securities licenses report to Finra, which requires adviser recommendations to be "suitable" to a client's needs. RIAs have long complained that the suitability standard is not good enough and that anyone selling investment products should do so only when it is in a client's best interests.

Banks in particular could be hurt by a blanket fiduciary standard, which conceivably could put an end to platform programs if a new rule stipulated that investors pay a flat fee for anything they buy, because many bank clients have fewer assets to invest.

Heywood Sloane, managing director of the Bank Insurance and Securities Association, noted that the bill's current language suggests proprietary products, commissions and selected lists of products are not off the table, but he remains wary of what the SEC might decide.

"As the SEC works through this, it has to allow people to provide services in a way that earns them a living," he said. "If not, you'll see only high-net-worth individuals taken care of, because the margins will be too tight on smaller accounts."

Many bank customers come in with as little as $10,000 or $20,000 to invest, and there's no way a fee-charging adviser can afford to spend the time crafting a full financial plan for accounts of this size. That's why banks created platform programs, licensing bankers so they could sell smaller clients investment products that fit their needs without requiring a full-fledged investment adviser to step in.

"There's no philosophical argument from advisers against acknowledging that your clients are important to you and you want to do right by them," Sloane said. "The question is whether implementation of a fiduciary rule would put them out of business."

Valerie Brown, the chief executive of Cetera, home to the broker-dealers Primevest, Multi-Financial and Financial Network, said the SEC is well aware of the issues involved. "We know from dialogue with the SEC that it understands that if it goes too far toward the '40 Act, applying to our world as written, it will take away access to good financial advice for middle America, which I don't believe is Congress' intent," she said.

Brown noted that the bill itself already allows for commission business and for advisers to make recommendations after which the fiduciary requirement stops, which means advisers could still hypothetically afford to serve smaller clients, depending on how fee-for-advice is structured.

By comparison, the Investment Advisors Act doesn't support commission business and its fiduciary standard goes beyond the initial advice.

Brown said the SEC may be reluctant to pile more responsibility for fiduciary oversight upon itself. "Even the SEC said it only has the resources to audit RIAs once every 10 years," she said. "So while someone may be a fiduciary in name, they're under-regulated, undersupervised, and they can do damage for years before the SEC steps in, as Bernie Madoff showed us. People do what you inspect, not just what you expect."

Ric Lager, an RIA and the president of his own firm in Golden Valley, Minn., countered that Madoff wasn't convicted on his advice, but on fraud related to his role as custodian. Lager maintains that a blanket fiduciary standard would separate slick salesmen from sage advisers. "It'll be based on how well one adviser fares in up, down and sideways markets," he said. "This would weed out bad advisers pretty quick."

However, Dick Starr, director of legislative, regulatory and compliance affairs at the BISA, said he doesn't believe much will come of the issue. "So they'll study this for six months, but to what purpose? They've already studied this issue; this is just kicking the can on down the road," he said. "Kicking this to the SEC is a waste of time and a waste of trust by the committee. There are many ways a fiduciary standard can be accommodated and there's no reason why not. This is financial reform in name only."

Depending on how Congress acts on the SEC's report, it could force many programs to take an advisory focus rather than sales today, Starr conceded.

But he noted that in six months there will be a newly elected Congress, which will have a big impact on what actually happens.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.