Reuters Money

The following is a guest post by Tim Kochis, the chairman and former CEO of Aspiriant. Barron’s ranked him fifth in its inaugural listing of the “Top 100 Independent Advisors” in the U.S. in 2007.

As the SEC prepares to begin its six month evaluation of the current rules governing registered investment advisors and brokerage firms, I hope that it takes a nuanced view of reality. Given the array of services, business models and client relationships that need to exist, I strongly believe that imposing a strict fiduciary standard on every firm and individual, in all circumstances, would be a big mistake.

It is important to distinguish sales efforts, the execution of transactions and the brokering of trades from the giving of advice. Imposing a fiduciary duty (putting the client’s interest first) is unrealistic in the sales environment or when brokering an investment between two customers, one a buyer and one a seller. Where both parties are clients, which client’s interest must the financial institution put first?

A non-fiduciary sales environment exists in all economic realms. We rely on consumers’ natural skepticism, access to alternatives, broadly available factual information, and a increasing flood of internet-based opinion to discipline price and quality in virtually everything else we might buy. Why can’t we simply apply caveat emptor to all financial services?

What makes many financial services unique is the industry’s rapid pace of innovation and the unavoidable uncertainty about the future outcomes its services are designed to address, combined with the low level of financial sophistication that afflicts many consumers.

A variable rate, interest-only mortgage, for example, can be a wonderful device for a client with a long horizon on ownership of the property, the discipline to invest (not spend) the cash flow savings, and the financial depth to withstand occasional interest rate spikes. That same device can spell disaster for a client with thin resources, no investment plan, and who must or chooses to sell the property early in the term. The solution, in this example, is certainly not to ban this form of mortgage, or to make any discussion of it be fiduciary in nature, but to make sure that advice about a specific client actually using it be rendered in a fiduciary context.

Disclosure of potential conflicts and “suitability” requirements already exist. Criminal laws and civil remedies for fraud or deceit are already in place. Having to tell the truth is already the law. But, legislating a new regime where all financial services are fiduciary would be impossible to put into practice.

In contrast, a fiduciary duty can and should be expected by the consumer and should be required of the provider if the service is understood to be advice. Sometimes, financial services providers permit the distinction between advice and other services to be confused, perhaps deliberately.

Having the entire relationship take on the mantle of fiduciary prestige can attract very profitable customers. This confusion is where the problem lies and is what the SEC can effectively address. However, it should not, as some of my RIA colleagues may hope, force brokers and sales organizations out of the advisory business altogether.

Instead, I believe the better solution would be to require firms and individuals to affirmatively declare, with clear acknowledgement by the consumer, when they are acting not in a fiduciary role. Absent that, their activities would default to a presumption of fiduciary conduct. When appropriate, consumers would then be put on notice to be wary.

For some firms, then, separate personnel, separate compensation systems, even separate facilities may need to be put in place to avoid any misunderstanding about whether a fiduciary duty applies or not. For firms like ours, there should never be any confusion. We always act as fiduciaries to our clients.