The CFA and a Higher Standard for Wealth Management

The new fiduciary standard for investment advisory won’t surprise CFA charterholders, they’re already using it

The Department of Labor rolled out its final changes to the Fiduciary Rule for financial advisors earlier this month. The new rule isn’t as restrictive as many in the industry had feared but still means a lot of changes for how advisors communicate with clients.
CFA candidates and those with the designation won’t be surprised by the new fiduciary rule and may be instrumental in helping the advisory industry adjust to the new regulation.
The Fiduciary Rule Gets Watered Down
Dodd-Frank legislation in 2010 required a fiduciary rule but it took years to work the proposal through government bureaucracy. The Labor Department withdrew an early plan in 2011 after push-back from the financial services and insurance industry. President Obama called for a new version in 2015 and set the DOL to the task.
A proposal was completed in January, setting off a firestorm of criticism from financial service providers. The U.S. Chamber of Commerce even threatened to sue the federal government on the new rules and the DOL received more than 3,000 comment letters after the proposal, the majority from those in the advisory industry against the changes.
The previous rule for advisors was a suitability standard for investment recommendations. The standard was highly subjective and advisors were free to recommend products with high fees as long as they could rationalize that the investment met their client’s need for return or risk. The new fiduciary rule seeks to require that advisors act in clients’ best interest, which would imply that they recommend lower cost product options when they exist.
From what I have seen of the new rules, most of the change revolves around presenting clients with a best-interest contract explaining the fiduciary rule. I’m critical of how effective this will be in aligning advisor-client interests or whether it will merely be another paper to sign when a client opens an account. A sticking point of the proposed rules was the timing of the contract signature. It was originally proposed that advisors would have to provide a best-interest contract on first interaction with potential clients but this requirement was dropped and the new rule only requires the contract when an advisory account is opened.
The final rules still allow advisors to earn commissions on retirement assets as long as they provide full disclosure to investors. IRA providers can still recommend in-house products without having to sign contracts with investors but the products must still meet best-interest standard.
The new rules will take effect April 2017 but advisors will have until January 2018 to become fully compliant.
CFA Curriculum and the Fiduciary Standard
The CFA Code and Standards has required the fiduciary standard well before the new rule was proposed. The fiduciary standard appears in several places in the Ethics & Standards material, first in the Prudent Investor Rule and then in requirements for Soft Dollar brokerage.
The fiduciary duty shows up first in Standard III: Duties to Clients with “Members and Candidates must determine applicable fiduciary duty and must comply with such duty to persons and interests to whom it is owed.”
The Prudent Investor Rule requires a fiduciary obligation to the client which entails loyalty, impartiality and prudence (care, skill and caution). The CFA Institute requires that clients’ interests should always receive the highest priority in investment research, above the interests of the firm and of the advisor.
In the soft-dollar standards, the investment manager must fulfill their fiduciary duty through three general practices.

  • Seeking to obtain best execution through best value
  • Minimize transaction costs
  • Use brokerage (soft dollars) only for the benefit of the client

The CFA Institute Research Foundation published a literature review around Investment Professionals and Fiduciary Duties in 2014 to aid in the conversation. Now that the new rules have been finalized, CFA candidates and members can be instrumental in helping the industry to understand the requirements and to accept the changes.
‘til next time, happy studyin’
Joseph Hogue, CFA

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