An Open Letter re: SEC (supposed) Fiduciary Rule

SEC 'Fiduciary Rule' Has A Long Way to Go

Spoiler: It isn't a 'fiduciary rule'

Now that the DOL Fiduciary rule has been defeated in court by the combined efforts of the broker/dealer and insurance industries, attention is focused on the SEC as they attempt to offer new rules related to how broker/dealers, Registered Investment Advisors, and their respective representatives interact with the investing public. Sadly, the SEC rule is anything but a fiduciary standard. (My comment letter submitted to the SEC below)

While the rule requires broker/dealer representatives to work in the best interest of their clients, it fails to subject them to a fiduciary standard, which offers significantly greater legal protection to the client. Instead, broker/dealers and their representatives will continue to be subject to the suitability standard.

Suitability Defined

The difference between a fiduciary standard and a suitability standard is vast. The fiduciary standard provides both a requirement for the advisor to act solely in the interests of the client and an opportunity for legal recourse should an advisor violate the standard and harm the client. The suitability standard, however, only requires the advisor to give advice which is suitable, even if the advice is not in the best interest of the client.

Suitability means an advisor can recommend an investment predominantly based upon how much the advisor is paid, so long as the investment is not bat-shit crazy. The suitability standard allows for investment advice which may clearly not be in the best interest of the client, but is still legal because there exists enough redeeming qualities to meet the extremely low bar of 'suitability.' 

Suitability is also how insurance agents (who are under the same standard) can sell a high cost annuity contract to a 21-year old college student, with an additional cost of a long-term-care rider in case the 21-year old developed exceptionally early-onset alzheimer's disease.   

Take Action

If you think this is a step in the wrong direction, you can read the proposed Best Interest Regulation on the SEC website and leave a comment for the SEC. The comment period ends August 7th. You can comment at Look for Regulation Best Interest posted April 18, 2018. Below is the comment letter I submitted to the SEC regarding the proposed regulation.

My Comment Submitted To The SEC:

While I applaud the SEC's attempt to increase the obligations of registered representatives of broker/dealers to deliver advice in the best interest of their clients, the end result of the proposed rule will cause more confusion amongst retail investors, and will likely result in continued harm to the public.

First, the regulation does not subject broker/dealers to a fiduciary standard, even while using the same language in describing the obligation of a registered representative to work in the best interest of the client. This 'borrowing' of the fiduciary language without subjecting a true fiduciary relationship can only lead to confusion in the consumers' mind regarding whether the relationship is under a fiduciary standard. As a result, a great number of unsuspecting investors will believe they have a fiduciary relationship with their broker representative, when none exists.

Further, hybrid broker/dealer-registered investment advisors will continue to be able to proffer advice under a two-hat model, whereby the representative can choose whether to be subjected to a fiduciary or suitability standard, and the client is intentionally left in the dark about whether the advice is subject to fiduciary relationship or not.

Continuing the existing two-hat model can ONLY lead to clients believing advice is subject to the fiduciary standard when, in fact, a portion of the advice is not. Worse, representatives have an obvious incentive to put on their "suitability" hat when their advice is questionable as to whether it is in the best interest of the client. As a result, investors will likely be following riskier advice with greatly reduced legal recourse; which is exactly when the investor needs the added protection of a fiduciary standard.

The SEC should use this opportunity to create a regulation far more in line with the obvious congressional intent of the Investment Advisors Act, whereby advice can only be offered under a fiduciary relationship, except when it is truly incidental to the sale of a product. And when advice is offered incidental to the sales relationship, the regulation should require the registered representative to disclose the advice is being made as part of a sales transaction and is not subject to the fiduciary standard. The regulation should further clearly define what constitutes as advice incidental to a sale so that registered representatives are not left to their own discretion in deciding if they wear the suitability hat or the fiduciary hat with their unsuspecting client.


Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. He is also the owner of Purposeful Strategic Partners, a Registered Investment Advisory firm. He can be reached for comment at