Yeah, That Fiduciary Standard Ought to Fix Everything


Is the fiduciary standard “higher” than the suitability standard? It’s usually reported that way, including in our very own InsuranceNewsNet.

The issue of the standard popped up again because the Securities and Exchange Commission is still grappling with whether to extend the fiduciary standard to include brokers. Those who support the fiduciary standard say brokers should be elevated to the “higher” standard so that brokers would be forced to put their clients’ interest first and avoid conflict of interest. I am simplifying the issue a little but those have been two major points of contention.

That sounds like an admirable standard. But is it “better” than the suitability standard, which requires that a recommendation be suitable for a client? With fiduciary duty, a broker would be required to recommend a product with a lower fee if the product is equal to another product. That makes sense if the products are actually identical. In fact, it is kind of slimy to recommend one of two identical products only because it offers a higher commission. But how often are two products identical? Companies work hard to distinguish their product from the next one.

So, what if Product A were a better choice because the company was rated higher, or the terms ensured a more secure retirement or a feature best addressed a client’s concern, but it paid a higher commission than Product B? What if they were pretty close, more or less equal, in the eyes of a regulator? Would that be a violation? That would probably be up to the regulator.

And what about conflict of interest? The fiduciary standard requires an advisor to avoid conflict of interest. Is that altogether preventing it?

Neither the fiduciary nor suitability standard is inherently inferior to the other, just more appropriate in different circumstances. Let’s face it, though, if the suitability standard were the reason that Bernard Madoff and Allen Stanford were able to steal billions of dollars from investors, it should be pushed aside.  But shoveling clients’ money into a roaring Ponzi scheme doesn’t strike me as suitable. What was most unsuitable in those cases was FINRA’s oversight.

Would the SEC do a better job at catching swindlers? That’s up for debate. But even David Blass, when he was the chief counsel of the SEC’s Division of Trading and Markets, was not so sure the fiduciary standard was “higher.”

He was quoted saying:

” ‘I don’t think that the adviser fiduciary duty is higher than suitability,’ rather they are separate concepts and suitability exists within the particular framework of B/D regulations, which includes many other rules, Blass told attendees at a conference earlier this year. ‘You can’t think of fiduciary duty and suitability alone.’

“The Division of Trading and Markets is helping to lead the fiduciary duty discussion within the SEC, Blass said, adding that it is taking into account the respective regulatory regimes and circumstances surrounding B/Ds and IAs. He pointed to the relatively low cost arbitration forum provided to B/D clients by the Financial Industry Regulatory Authority, and the lack of such an option for IA clients, as an example of the ways in which the industries and their relationships with clients differ.”

This quote was taken from a blog post expressing dismay that an SEC staffer would say this.

In the wake of the epic Ponzi schemes, FINRA was faulted for its lax oversight because staffers were often looking for their next job at the very companies they were regulating. So, the SEC surely should do better, right?

Well, let’s take another look at Blass. He voiced the previous opinion at a conference in April. By July, Blass had taken a new job at the Investment Company Institute. And, guess what? ICI does not appear to like the fiduciary standard much.

InvestmentNews reported this in 2011:

“Indeed, a number of attendees of the Investment Company Institute’s Mutual Funds and Investment Management Conference last week said that a single standard of care will drastically alter the way fund firms sell their offerings.”

Apparently the SEC does have some expertise on conflict of interest after all.


Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. Connect with Steve →

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