January 3, 2018

Much has been written in the last couple of years regarding the “fiduciary rule” rekindled by the 2015 announcement by the Department of Labor (DOL) of a seemingly straightforward and reasonable proposal which would require all firms and individuals who provide investment advice to retirement plans and IRAs to abide by a “fiduciary” standard. To be a fiduciary requires putting clients’ best interests before one’s own interests. This set off intense opposition by providers who claim they would need to adjust their offering and compensation structures to comply, resulting in the current delay in the rule’s implementation. For example, brokers and insurance agents—who have been regulated under the less-lofty “suitability” standard—would need to demonstrate and document that the products they sell are truly in the best interests of their clients. Despite the delay, some aspects of the industry have already begun to react; for example, mutual fund companies have voluntarily reduced their fees—good news for current and future retirees. 

Having spent the past 25 years with a firm that helped define the investment counseling profession and now wrapping up my nine-year term on the Board of Governors of the Investment Adviser Association, the 80-year-old organization representing our industry, I find myself questioning the recent fuss. The “fiduciary standard” is a simple concept which has been deeply-rooted in Clifford Swan’s and the investment counseling industry’s DNA from its very founding.

"The “fiduciary standard” is a simple concept which has been deeply-rooted in Clifford Swan’s and the investment counseling industry’s DNA from its very founding."

In 1921, thirteen years before the creation of our regulating body, the Securities and Exchange Commission, and only eight years after the Department of Labor was established, A.M. Clifford proclaimed in the Los Angeles Times that he was “…prepared to act solely in an advisory capacity from an impartial, independent and disinterested position…” This was a radical departure in an era of commission-based, sales-driven brokers.

In 1937, the then-named Investment Counsel Association of America adopted its Code of Professional Practice, which included the following principle: “neither the firm nor any partner, executive or employee thereof should directly or indirectly engage in any activity which may jeopardize the firm’s ability to render unbiased investment advice.” While this Code has evolved to include the term “fiduciary,” what has not changed is the notion that the “investment adviser stands in a special relationship of trust and confidence with, and therefore is a fiduciary to, its clients.” 

Formal regulation of our industry finally caught up in 1940, thanks to the enactment of the Investment Advisers Act of 1940. In the section titled Standard of Conduct, the Act directs the SEC to “promulgate rules” ensuring advisers “act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”

Many retirement investors are left awaiting the DOL’s rule implementation and, longer-term, a potential universal fiduciary standard which would apply to all who provide investment advice. Meanwhile, our fellow investment counselors and their firms, guided by the Investment Advisers Act of 1940 and represented by the Investment Adviser Association, have and will continue to espouse these fiduciary principles: clients first, transparency, and confidentiality. These principles have provided the foundation we have stood upon since the industry’s creation.

Download Article: What's All the Fuss about a Fiduciary Standard? 

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