Maven Asset Partners
April 16, 2019
By emphasizing the application of technology and a systematic investment process, Maven delivers a series of strategic and tactical asset management strategies.

Compliance with Fiduciary Standards: Selecting a Goalpost

Independent advisors have got to be baffled by the tug-of-war over fiduciary standards currently underway at the state and federal level with no resolution in sight. That potentially leaves broker-dealers, in particular, stuck in limbo.

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SEC versus the states on fiduciary standards

Soon after the current administration revoked the Department of Labor (DOL) fiduciary regulations governing investment advisors, some states responded with their own bills to preserve much of the rescinded rules. In general, the bills written by states are seeking to apply higher fiduciary standards of “caveat venditor” which means a seller of investment advice must be scrupulously fair, prohibited from being deceptive and must consider customer’s need and financial capacity. Overall, fiduciary standards require investment advisors to place the interests of their customers ahead of their own, and any conflict of interest is prohibited as is any variable compensation. State bills are attempting to stem conflicts-of-interest by ensuring that clients receive information about potential conflicts of interest by requiring investment advisors to disclose the sources of their earnings which would reveal whether they are paid by sponsors whose interests may not align with those of customers.

SEC’s best interest rule is similar to fiduciary standard, the ambiguity of the semantics notwithstanding, with a greater accent on informed consent and disclosures of material conflicts rather than a mandate to act by fiduciary standards. The devil is in the details, and the definitions are vague enough to expect that their implementation will happen in, as yet, unknown ways. At a minimum, the best interest rules of the SEC have a requirement that even broker-dealers providing investment advice keep the interests of their retail clients ahead of their own which is fulfilled when they disclose, mitigate and eliminate material conflicts of interest. For investment advisors, there are additional obligations which are more expansive with a duty of care or to provide continuous monitoring and advice while the duty to loyalty has a lower standard to disclose but not necessarily mitigate or eliminate conflicts of interest.

Beyond the Department of Labor fiduciary standards

Maryland’s proposed fiduciary rules expand their application to far beyond that of the now-defunct DOL regulations for RIAs. The fiduciary rules, currently under consideration, will cover broker-dealers, insurance agents and other agents in a financial advising role.  They will also extend consumer protections to financial institutions, real-estate brokers and commercial law. Similar laws are under consideration in Nevada, New Jersey, and Connecticut. They have all run into roadblocks in their legislating bodies, but the proponents are not giving up.

All of the aforementioned legislative activity could result in a potpourri of fiduciary rules. For advisors at a broker-dealer and with clients in different states, navigating this environment is likely to make a root canal seem pleasant.  If you fit into this camp and are thinking about going independent, what are you waiting for at this point?

Conclusion

As an investment adviser registered under The Investment Advisers Act of 1940, Maven Partners seeks to assimilate the best practices from all regulatory, professional and voluntary bodies to ensure our fiduciary “bar” is set high. As such, when advisors outsource their asset management to us, they can not only rely on an investment process that is sophisticated and consistent, but also a fiduciary standard designed to match or exceed the independent advisors’ own standard for always keeping the clients’ best interest ahead of their own.

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