What We Learned in Fiduciary September

Rutgers law professor, Arthur Laby, received the Institute’s Frankel Fiduciary Prize. Decades of research and writing on fiduciary advice and investment advisor and broker-dealer regulation set Laby apart. His 2020 article, Advisors as Fiduciaries, is a required primer for fiduciary advocates. It tells the story of classic advice professions, and that fiduciary advice is unique, important and necessitates client trust.

Fiduciary September speakers provided a rich perspective. They illustrate why the framers of the Advisers Act of 1940, jurists, and the Supreme Court have interpreted fiduciary principles with such high regard.

During the Depression in 1934, Supreme Chief Justice Harlan F. Stone wrote, “No thinking man can believe that an economy built upon a business foundation can permanently endure without some loyalty to that (fiduciary) principle.” In 1963, the Supreme Court’s Capital Gains case set out the unique importance of fiduciary advice.

This year the Court, in Hughes versus Northwestern University, underscored key principles. Securities attorney James Watkins stated, “The key takeaways are the fact that the decision was unanimous and the fact that the Court officially discredited the ’menu of options, or choice’ arguments. Cost-inefficient and otherwise imprudent investment options are never a legitimate "choice" for any investor.”

Reg BI is the most divisive issue in the fiduciary discussion.

Boston University law professor emerita, Tamar Frankel, comments on the SEC’s Reg BI were concise. She wrote in 2020, “Regulation Best Interest ignores the brokers' advisory sales-talk and waters-down significantly brokers' fiduciary duties. In fact, little remains.”

So, what did Fiduciary September speakers teach or remind us? Here are four takeaways:

• SEC rules are important – and limited. They have been interpreted in limited ways. Federal regulators set a floor, below which conduct is not supposed to fall. They did not set advice and planning standards for a profession. Advisors must set a ceiling for advisors to reach.

• State regulators play a key role. NASAA’s November 2021 report released new data showing how Reg BI has failed. State regulators are also taking the lead on “finfluencers.” The Washington Post reported that state regulators are leading on crypto currency regulation.

• Lawyers and legal scholars linked the law to advisors and planners. Their role preserving, protecting and defending fiduciary principles is indispensable.

• Advisers and planners must lead. (They are the fiduciary supermen/women.) They and their member organizations are responsible for a high advice standard – real fiduciary advice. Their vision, energy and willingness to act with competence and do what’s right determine “the standard.” Their task is to explain what this means to consumer clients and why it matters.

The meaning of advice in federal regulation has fundamentally changed over the last 15 years. The main actors on the fiduciary “stage” are important. They must help create a renaissance of values that sustain a profession. Advisors and planners can best lead this renaissance. Indeed, they are the only actors who can lead on this stage.

Knut A. Rostad, MBA, is the co-founder and president of the Institute for the Fiduciary Standard, a nonprofit formed in 2011 to advance the fiduciary standard through research, education and advocacy.

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