Events such as the financial crisis and the discovery of Ponzi schemes have put increased attention on the regulation of financial advisers. As Congress and regulators evaluate changes to make to the retail securities space, one proposal is to make registered representatives adhere to a fiduciary standard, to which registered investment advisers (RIAs) already adhere (see “House Panel Passes Investor Protection Act”).

Research from Aite Group found that the majority of surveyed advisers (84% retail brokers and 16% fee-only RIAs) give the regulatory initiative a less than 50% chance of being put into place. Only 16% are fully convinced that the fiduciary standard will be implemented, citing the following as obstacles: loss of momentum once the economy recovers (22%), opposition from the brokerage industry (22%), and disagreement between the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) (17%).

If the measure does pass, 40% of advisers believe it will help rebuild the investor’s trust (26% disagree). However, advisers are split as to whether a fiduciary standard would help prevent another Ponzi scheme: While 34% of advisers agree that it would help, nearly 40% disagree.

Changing Adviser Business

The fiduciary status of RIAs is often looked at as a competitive advantage over brokers. The largest number (44%) of surveyed RIAs do not think they will lose their competitive advantage if a fiduciary standard for brokers is implemented—but almost a third (29%) are unsure, and more than a quarter (26%) think they will lose an advantage, according to the Aite report.

"While independent RIAs have long cited the fiduciary standards of their industry as a major differentiator, its implementation for retail brokers could remove it as such," said Alois Pirker, research director with Aite Group and author of the report, in a release. "Brokers believe that a fiduciary standard would lead to an advice model very similar to the one utilized by independent RIAs. RIAs, on the other hand, believe that brokers would have a hard time adjusting to the requirements of a fiduciary standard, and that they themselves will not lose their competitive fiduciary advantage as a result of this measure."

Advisers also cite other changes that a fiduciary standard could bring. Surveyed advisers, especially RIAs, predict that implementing a fiduciary standard would result in brokers being allowed to offer financial a planning advice, which would increase the use of financial planning (48% of RIAs, 40% of brokers). Going along with that, many surveyed advisers believe a fiduciary standard will lead to more a focus on investment risks rather than investment-return-driven product selection (56% of RIAs, 41% of brokers).

A fiduciary standard could also change how brokers get paid. The report noted that many brokerage firms, such as Morgan Stanley Smith Barney, have managed to offer fee-based products without turning their entire broker force into fiduciaries. Close to half of all surveyed advisers said a fiduciary standard would result in more such fee-based assets at brokerage firms (58% of RIAs, 45% of brokers).

Aite based its study on a survey of 402 financial advisers conducted in Q4.

More information about the report is available at www.aitegroup.com