When the recently proposed fiduciary rules are finalized there will likely continue to be significant differences between how Registered Investment Advisors (RIAs) and brokers interact with their retirement plan clients from a fiduciary standpoint.
Currently, RIAs are required to act as fiduciaries to their clients while brokers, essentially, are not. This is confusing to plan sponsors because most assume that any investment advisor they work with takes on fiduciary responsibility when they share advice. However, since brokers are acting as agents for their employers, they are allowed to offer advice and products based upon a "suitability" standard. This standard permits brokers to share advice that may put their interests or their firm's interests ahead of their client's. RIAs are always required to keep their client's best interests first.
After the proposed rules become law, assuming they are not changed significantly, there will continue to be differences between brokers and RIAs in fiduciary responsibility, regulator review and services offered. As the proposed regulations outline, there are many exceptions and exemptions with regard to broker fiduciary responsibility.
This lack of continuity between advice givers is likely to continue to confuse plan sponsors seeking advice. Currently, many plan sponsors don't really know whether they are working with a broker or RIA, nor do they understand what difference it makes. The goal of harmonization is to ensure that brokers and RIAs fall under the same fiduciary rules and regulations so that clients will not have to worry about whether they are working with one or the other. Harmonization would ensure that both deliver the same standard of fiduciary care.
Recently, MarketCounsels founder and CEO Brian Hamburger addressed the issue of harmonization. Hamburger outlined what has occurred in the United Kingdom where advice givers must decide whether they are a broker or an advisor.
Based upon that decision, an advice givers registration will differ as will their required standard of care toward clients. According to Hamburger, this approach to registration makes it easier for investors in the U.K. to know whom to use: a broker for transactional advice and assistance, or an advisor for conflict-free investment advice.
In the U.S., brokers have historically been used to execute buy/sell transactions. In contrast RIAs have provided conflict-free investment advice and guidance. Is it likely that the U.S. will adopt a model similar to what is being used in the U.K.? Hamburger didn't think so because the brokerage lobby in Washington is too strong. Is harmonization then the likely result? If so, many experts believe it will be a long, bitter fight.
Robert C. Lawton, AIF, CRPS is president of Lawton Retirement Plan Consultants, LLC, an RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at firstname.lastname@example.org or 414.828.4015.
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