Exclusive Interview with CFA’s Barbara Roper: Why a Fiduciary Standard Helps All Investors and 401k Plan Sponsors

May 21
00:30 2013

What is the most obvious reason we should have a fiduciary standard? Why is the biggest fear not that regulators don’t act, but that they do? How come annuity sales organizations are among the most vocal opponents of the fiduciary B_Roper_3_2011standard? Why is investor education not the barrier many believe it to be? What more consumer-friendly term should replace the term “fiduciary duty”? What’s the one thing all 401k plan sponsors should ask their adviser? Why will fiduciary advisers will never be able to convincingly market themselves? How could the SEC have prevented this entire fiduciary mess in the first place?

These are just a few of the amazing answers Consumer Federation of America’s director of investor protection Barbara Roper offered our readers when she agreed to sit down with for an exclusive interview. And, boy, did she wow us! A leading consumer spokesperson on investor protection issues, Roper currently serves as a member of the Securities and Exchange Commission’s Investor Advisory Committee as well as the Public Company Accounting Oversight Board’s Standing Advisory Group and its Investor Advisory Group. She has received distinguished service awards from the National Association of Personal Financial Advisers and the North American Securities Administrators Association and the Consumer Excellence Award from Consumer Action. In 2012 she was recognized as a “Money Hero” by Money Magazine.

FN: Barbara, it’s an honoring speaking to you. Tell us a little about the CFA, when its started, what’s its basic mission and one or two of its highlight achievements.
Roper: CFA was formed in 1968 to provide a voice in Washington for the consumer movement. As our name suggests, we are a federation of national, state and local consumer organizations. We work on a broad range of consumer issues, including food and product safety, energy efficiency, telecommunications policy, and privacy. But we have always had strong concentration in financial issues, including banking, insurance, and high cost credit, along with the investor protection issues I work on.  Just in the last several years, CFA was heavily involved in successful efforts to get the automobile fuel economy standards raised, to pass the Consumer Product Safety Improvement Act, and the Food and Drug Administration Reform Act. And, of course, CFA was heavily involved in the legislation fight for Wall Street reform following the financial crisis, including creation of the Consumer Financial Protection Bureau.

FN: How long has the CFA been involved in safeguarding investors and what is an example (outside of the fiduciary realm) of an issue it’s worked on?
I guess you could say I launched CFA’s investor protection efforts when I joined CFA in 1986.  I had been hired to edit the organization’s publications. Almost by chance, I was asked to write a study on financial planning abuses, which received a tremendous amount of press coverage when we released it in 1987. The consumer movement had really neglected investor protection issues before that time, so by default I become the consumer movement’s investor protection “expert.” At the time, NASAA and congressmen Dingell and Markey were really leading the charge on those issues, and I got swept along. Over the years, I’ve tended to focus on what I think of as retail investor protection issues – issues like mutual fund disclosure and regulation of the financial professionals investors rely on for advice and recommendations. But because of our markets’ recent tendency toward crises, I’ve spent an inordinate amount of time on more structural issues, such as the auditing reforms adopted in the wake of the Enron scandal and issues related to asset backed securities, credit rating agencies, and derivatives in the wake of the most recent financial crisis.

FN: When and how did the issue of the fiduciary standard appear on the CFA’s radar?
Roper: I like to say I’ve been working on the fiduciary standard issue, in one form or another, since I joined CFA in 1986. People tend forget that, at the time, many financial planners were as resistant to the notion that they should have a fiduciary duty when implementing their plans as brokers are today. So my original study on financial planning abuses included a call for financial planners to be subject to a fiduciary duty throughout the planning process, including when they were selling products to implement their recommendations. Our efforts to ensure that brokers are subject to a fiduciary duty when they give advice grew out of that, particularly as brokers began increasingly to use titles that implied they were advisers and to market their services as if they were primarily advisory in nature. We concluded that either they were misrepresenting the services they offer or they had long since ceased to qualify for the “solely incidental to” exception from the Investment Advisers Act under any reasonable interpretation of that phrase. Clearly, they were marketing themselves in ways that were designed to create the sort of relationship of trust that creates, or ought to create, a fiduciary obligation.

FN: Why do you think the fiduciary standard is so important?
Roper: The longer I work on this issue, the more convinced I become that ensuring that all advice is subject to a robust fiduciary standard is the most important thing we can do to improve protections for average investors. We all know that investors can’t distinguish between brokers and investment advisers, particularly since brokers have been allowed to re-brand themselves as financial advisers. They don’t understand the difference between a fiduciary duty and a suitability standard. They certainly don’t understand that their investment adviser has to act in their best interest, but their financial adviser doesn’t. And why should they understand it? It doesn’t make sense. The upshot of all of this is that the typical investor simply can’t make an informed choice between the different types of financial professionals. Beyond that, we know that the typical investor is also ill-equipped to evaluate investments, does very little independent research of the investments recommended to them, and relies heavily, if not exclusively, on the recommendations they receive. That makes investors extraordinarily vulnerable and is precisely the sort of relationship of trust that demands fiduciary protection.

FN: What do you suggest be done to make ordinary investors more aware of the importance of using a fiduciary?
I am actually quite skeptical that this is a problem that lends itself to an investor education solution. If we are going to have a chance to change investor behavior, we are going to have to stop talking about a fiduciary duty and start talking about the best interests of the customer, even if that only partially captures the extent of fiduciary protections. In addition, I think it is long past time we had a pre-engagement disclosure document that all financial professionals are required to provide that covers these basic questions: Who are you? What services do you provide? What will I pay? How do you charge for your services? What are your conflicts of interest? And are there any significant blemishes in your disciplinary history? Even then, however, I think the real answer is to ensure that anyone who is acting as an adviser – or holding themselves out in a way that creates a reasonable expectation that they will be acting as an adviser – has to be held to a fiduciary standard. That’s the right policy for a number of reasons, not least because it doesn’t limit its protections to the most knowledgeable investors who are able to make an informed choice.

FN: What regulators have you (or the CFA) been in contact with and what have you taken away from those discussions?
I’ve talked to pretty much anyone and everyone who will listen. Since about 2000, my first communication to each incoming SEC chairman has been a letter on the need to raise the standard of conduct for brokers giving investment advice. Most recently, I used the opportunity of my “get to know you” meeting with new SEC Chair Mary Jo White to emphasize the importance of this issue for retail investors and, admittedly in very general terms, to raise concerns we have about what we see as some pretty gaping holes in the fiduciary standard that appears to be contemplated by the SEC’s recently released request for information. Chair White didn’t strike me as someone who shows her cards before she is ready, but she certainly seemed to recognize the importance of the issue. I’ve also met several times with Phyllis Borzi and her staff at DOL, who despite the resistance they are receiving, appear to be hard at work finalizing their proposed fiduciary definition, prohibited transaction exemptions, and economic analysis. A lot of the opposition to the DOL proposal is based on speculation about what form it is likely to take, so we’re anxious to see actual language so that we can move from a debate about fears to a discussion based on facts.

FN: There’s a lot of horror stories when it comes to the financial industry. What is your biggest fear should Washington continue to allow non-fiduciaries to offer “advice” in the guise of selling?
The worst horror stories involve conduct that violates not just a fiduciary duty, but a suitability standard as well. The harm to investors from conduct that complies with the suitability standard tends to be more subtle, which is of course one of the reasons it is so hard to get regulators to act. So I guess I have two fears, one based on regulators’ doing nothing, and the other based on regulators’ adopting a rule that appears to raise the standard but doesn’t really change anything. If you read between the lines of the SEC’s recent request for information, that second option appears to be a very real risk.

In either case, we just get more of what we have now – investors who need to make every penny work for them paying too much for mediocre investments based on recommendations that don’t adequately assess what is in their best interests. Those investors may not have headline-grabbing horror stories to tell, but they end up with less money to retire on than they need to live comfortably or having to borrow extensively to fund their children’s college education. At least if regulators do nothing, we’ll be able to continue to press for action. If they pretend to adopt a fiduciary standard, but really just require brokers to make a few more disclosures about conflicts of interest, then we’ll have lost the opportunity to solve the problem for some years to come without have achieved any meaningful new protections for the customers of broker-dealers. Based on the assumptions in the SEC’s recent request for information, I am very concerned that this may be the direction in which it is currently headed, but I think we still have an opportunity to turn that around.

Actually, I have a third fear, and that is that the SEC adopts a tough fiduciary standard, and the broker-dealers who are brokers solely because they sell a few variable annuities will simply switch to equity-indexed annuities to evade the rules. After all, there’s a reason NAIFA and AALU have been the strongest opponents of a fiduciary standard. It is the brokers whose business is based on selling high-cost variable annuities loaded up with features the investor doesn’t really need who would be most affected by a strong fiduciary standard. Until we rationalize our regulatory approach to eliminate the inconsistency in standards across the financial services more generally, there will always be loopholes that financial service providers can use to evade effective regulation.

FN: Many of our readers are 401k plan sponsors. What can they do to insure they conduct the proper due diligence to insure their adviser is a real fiduciary?
Roper: [Editor’s Note: Roper starts by saying, “This isn’t really my area of expertise.”]  I think the simplest answer is to ensure that their so-called adviser really is an adviser, for example a registered investment adviser, who is automatically subject to a fiduciary duty with regard to all their clients in all circumstances. After all, even if the SEC adopts a fiduciary standard for brokers, it will apply only to retail investors, so it is not clear how plan sponsors would be affected. That’s one reason the DOL rulemaking is so important. They need to close the loopholes that currently make it all too difficult to enforce the existing fiduciary standard.

FN: The vast bulk of our readers are in the financial service industry. How would you advise them to best promote their fiduciary services in a way that resonates with their clients?
One of the reasons I believe so strongly that we need to raise the standard for brokers is that I don’t think it is possible to compete effectively based on their heightened legal standard fiduciaries are subject to. As long as brokers are allowed to call themselves financial advisers, offer investment “planning” and retirement “planning” and other such advisory services, and market themselves as if they are acting as trusted advisers, investors are going to believe that that’s what they are, and true fiduciaries are going to find it difficult if not impossible to differentiate themselves. After all, research shows that investors don’t understand the difference between a fiduciary duty and a suitability standard, and many of them actually believe that suitability is the higher standard. So the only advice I guess I can offer is to continue to serve your clients’ best interests and let the results speak for themselves – that and join us in the fight to get a true, meaningful fiduciary standard applied to all investment advice regardless of the source.

FN: Lastly, we do have a number of regulators among our readership. What advice would you give them when it comes to drafting fiduciary language?
In a very real sense, the Securities and Exchange Commission created the problem that we are dealing with today because it put brokers’ interests ahead of investors’ interests.  When brokers first started calling their sales reps “financial consultants” and “financial advisers” and offering financial plans and generally rebranding themselves as advisers, the Commission could have nipped it in the bud. They could have said that if brokers wanted to compete as advisers they had to be regulated as advisers. Brokers would then have been forced to make a simple business decision – did the benefits of competing as an adviser outweigh the costs of regulation as an adviser. But the SEC was so anxious to accommodate the broker-dealer community that it failed to meet its responsibilities to investors, and the result is the marketplace we see today – a blurring of lines between brokers and advisers, a significant overlap in the services they offer, inconsistent standards governing those services, and no conceivable way that the typical investor will ever be able to make sense of it.

That’s water under the bridge. But it is absolutely essential that regulators don’t make that same mistake again. That doesn’t mean that we are advocating a purist approach that doesn’t allow for a transaction-based business model. On the contrary, we believe there are investors for whom this is an attractive alternative, as long as the advice or recommendations they receive are truly designed with their best interests in mind. Simply requiring a few additional disclosures about conflicts of interest is not going to get us there. Any fiduciary rule must include a clear, enforceable, principles-based standard requiring the broker to have a reasonable basis for believing that their recommendation is in the best interests of the customer. That doesn’t mean the broker can’t get paid for his or her services. It doesn’t mean they can only recommend no-load products. But it does mean they can’t ignore costs or other considerations, such as tax consequences, that are important to the customer’s financial well-being. And once the rule is adopted, it doesn’t end there. The regulators need to be prepared to enforce the rule in a way that truly enhances protections for investors.

FN: Any final thoughts you’d like to leave our readers?
This has been an inordinately long fight, and it sometimes seems that we have precious little to show for it. But there has been progress. In the 1980s, many financial planners resisted the notion that they had a fiduciary obligation throughout the planning engagement. Now that is conventional wisdom in the planning profession. It wasn’t that long ago that the broker-dealer community denied that investors were confused. Now that is widely accepted by virtually all parties to this debate. And, while we may have disagreements over what a fiduciary standard for brokers should look like, the main trade association for brokers, SIFMA, has taken a major step in acknowledging the need for such a standard. We have an opportunity to make real progress.  We mustn’t let it slip away with half measures and empty gestures that offer the appearance, but not the reality, of reform.

FN: Barbara, on behalf of and its many readers, thank you very much for taking the time to share your thoughtful insights and powerful advice with us. We can only hope our readers pass your ideas on to the right people.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

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  1. Steve Thomas
    Steve Thomas May 22, 11:17

    BRAVO! Tremendous article. As a former regulator and now compliance consultant Barbara Roper hits this topic directly on its head. Now is the time to implement a fiduciary standard across all financial service fields. But as she mentions, if you think the BD community is fighting true fiduciary standards – wait till it is proposed across the board for insurance agents….ST

  2. Ben Baldwin
    Ben Baldwin May 22, 19:51

    Excellent Barbara . . . keep up the good fight for the consumer.


  3. Larry Elford
    Larry Elford May 30, 15:59

    Bravo to Barbara Roper for her work!!

    The title misrepresentation (salesman-advisor-broker) game along with the less than suitable investment choices that result when a commission salesperson passes themselves off as an investment professional are approaching fraud in my opinion. Clients should know that they can and should be taking steps to get their money back from intentional deceit of the consumer……many clients are doing exactly this, but it is a closely guarded secret within the investment community:

    I am a recovering ex-broker (in Canada) who has pointed my life in the direction of helping those who need help, and not preying upon them as a professional. I saw much too much of that while I was in the industry. See GET YOUR MONEY BACK topic at

    Cheers and best

    Larry Elford
    Alberta Canada

  4. Edward H. Rudberg
    Edward H. Rudberg June 30, 17:33

    This is a subject that I now have some meaningful understanding on. Thank you, Barbara Roper. It has been such a vague but extremely important subject for the average person to know, but are so uninformed about. Barbara has sliced through each problem area to enlighten us.

    I was hurt financially a lot, by thinking that all brokers or advisers had to do their best for their customers. After all they were the professionals. They knew what they were doing. I learned, though, the hard way, that that is not necessarily the case. I especially got hurt by advisers, who had little to no bear market understanding, and in 2000, left me with huge losses.

    I invest/trade now, on my own. I always know where I stand.

    I am concerned about those folks who don’t understand what Barbara has talked about and thus become victims of an industry with mixed ideas.

    I hope that we get a REAL FIX to this problem, so that innocent people aren’t taken out to slaughter, in the future. People need to have real backing (hippocratic oath equivalent) in writing, with legal consequences, so that they have some recourse. if they can’t TRUST their (fiduciaries) or those who they have faithfully chosen to broker their hard-earned money…fiduciary or not, then they must have legal recourse.

    Thank you, Ed

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