A focus on the fiduciary standard puts adviser negligence in the spotlight

The SEC has highlighted how some investment professionals face greater scrutiny than others.

Discussion surrounding the implementation of the “fiduciary rule” — which calls on financial advisers to act in the best interest of their clients — has thrown into sharp relief the disparity in protection investors receive from different types of advisers.

Joseph Brenner, chief counsel of the Securities and Exchange Commission’s Division of Enforcement, told a public meeting of investment lawyers in March that financial advisers who are held to a fiduciary standard face greater scrutiny for negligence than others in the field.

Registered investment advisers (RIAs) are regulated by the SEC and held to a fiduciary standard, whereas broker-dealers — governed by the Financial Industry Regulatory Authority, an industry self-regulator — are held to a less stringent “suitability standard”. Broker-dealers need only show that their recommendations are suitable for clients and not necessarily in their best interests.

“A greater scrutiny for negligence is one of a number of benefits the fiduciary standard has for investors,” says Barbara Roper, director of investor protection for the Consumer Federation of America, a lobby group. “Being a financial adviser implies a careful process. Advisers should be competent to determine what’s in their clients’ best interests. And if advisers embrace a fiduciary standard they would likely have a better defense against claims of negligence.”

Whether the extension of the more onerous standard leads to more or fewer advisers being challenged on the suitability of their investment recommendations remains to be seen.

Several recent SEC rulings have considered whether advisers were negligent. Most involve either an investment adviser who was aware of something — such as a conflict of interest — that should have been disclosed to the client but was not, or the adviser did something that was inconsistent with what they had represented to their clients...

Read my original article in full the Financial Times.