In the summer of 2010, almost two years removed from one of the biggest financial disasters the United States has ever seen, there was reason to believe there was a light at the end of the tunnel. Best of all, it seemed the lessons we learned after the crash of 2008-2009 were not going unheeded.
Perhaps the best evidence of this was the signing of the Dodd-Frank Act by President Obama on July 21, 2010. Senators Chris Dodd (D-CT) and Barney Frank (D-MA) spearheaded a proposal that President Obama described as a “sweeping overhaul of the United States financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression.”
Among the Act’s almost 100 provisions, was the authority given to the Securities and Exchange Commission (SEC) to write a regulation requiring financial advisors to act in the best interest of their clients at all times—otherwise known as ‘fiduciary responsibility.’
A fiduciary responsibility is ‘a legal duty to act solely in another party’s interests.’ Fiduciaries may not profit from their relationship with their principals unless they have the principal’s express informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries’ other clients. A fiduciary duty is the strictest duty of care recognized by the United States legal system.
Fast-forward four years, and many experts are warning of another impending financial crisis. But at least this time investors will be protected by the fiduciary responsibility of their brokers, right?
Not so fast. See, not long after the Dodd-Frank Act was signed into law—and further expanded to cover clients with retirement plans by the Department of Labor (DOL)—the lobbyists and the financial industry itself became involved, concerned that such a responsibility could cut into profits and commissions. You can guess what followed.
So here we stand at the four-year anniversary of the Dodd-Frank Act, no closer to fiduciary responsibility in the markets.
At least the Department of Labor keeps us apprised of their progress, slow as it may be. In May, the DOL announced they’d be delaying the re-proposal of their rule relating to IRAs until January 2015. The SEC, for their part, is still deciding whether they’ll pursue the regulation at all.
Barbara Roper, Director of Investor Protection at the Consumer Federation of America, is staunchly in favor of imposing fiduciary duty on financial advisors. To Ms. Roper, it’s a question of loyalty—advisors present themselves as a representative of the client when their obligation is to their firm. Such a regulation, she argues, would allow investors to enter any arrangement with their eyes wide open.
“It’s about distinguishing advice from a sales pitch,” she summarized.
At the same time, Ms. Roper makes these remarks with her own eyes open, pointing out that decision-making hasn’t been the strength of the SEC to this point.
“If it’s this hard to make a decision on whether to engage in rule making,” she reasoned, “how hard will it be to reach a consensus on a final rule?”