A recent ruling by the highest court in Massachusetts affirming a state requirement that all financial advisors, including brokers, must act as fiduciaries seems likely to become another issue on which red states and blue states veer off in different directions.
While it’s not generating as much attention or heat as abortion or voting rights, the question of whether financial advisors must always put their clients’ interests first has been simmering for almost a quarter century. In 1999, as computer technology and the rise of discount brokers eroded the commission-based revenue of traditional brokerage firms, the Securities and Exchange Commission proposed a rule allowing brokers to offer fee-based accounts without being subject to the Investment Advisers Act, exempting them from being required to act as fiduciaries. Proposed after Merrill Lynch started offering fee-based accounts, the rule wasn’t formally adopted until 2005, although the SEC said brokers could act as if the rule existed.
In 2007, a federal appeals court overturned the rule, saying brokerage firms that charge fees or provide fee-based accounts are subject to the Investment Advisers Act and have a fiduciary responsibility. Instead of turning their brokerage forces into fiduciaries, the firms created RIA subsidiaries and their registered representatives also became investment adviser representatives of the corporate RIA, a two-hat solution that is where things now stand.
Concurrent with these developments, of course, investors experienced the global financial crisis of 2008-2009, shocks related to the Covid pandemic, and the steady march of baby boomers into retirement — all of which fueled demand for financial planning and investment advice. For investors, the question of whether advisors put their clients’ interests first at all times (even if only a sliver of investors recognizes that duty as the definition of a fiduciary) has become more important, especially as private-sector pensions have largely disappeared and retirement income has become an individual’s responsibility.
After a federal appeals court in 2018 vacated a Department of Labor rule that would have required advisors providing advice on qualified retirement accounts to be fiduciaries, the SEC introduced Regulation Best Interest. Is it a fiduciary standard? No. Is it better? Brokerage firms say it is; RIAs say it’s worse.
Such differences of opinion among special interests are the reason lobbying firms grow rich and wrangling over regulation never ends. Most times, the public has neither the time nor interest to care about Washington’s favorite sport — or to wade through disclosures that serve the letter of the law but rarely illuminate.
With the Massachusetts decision, the fiduciary question now moves to states, where it is likely to become even more political than when lobbyists deal with a Republican- or Democratic-controlled SEC. In blue states, the argument will be that a fiduciary standard would protect investors. In red states, it will be about protecting an individual’s freedom to choose the kind of advice they want. The fighting isn’t over.