Comment to DoL Fiduciary Rule Proposal RIN 1210-AB32

Robert Andriano, CFA

CIO Pure Investment Advisers

Chair Market Integrity Committee, New York Society of Security Analysts

Member CFA Institute

July 21, 2015

The following comments represent my personal views and analysis. They are not the position of Pure 

Investment Advisers, NYSSA or CFA Institute.

Prudent and skilled management of individual retirement funds is of crucial importance not just for 

retirees but also for the future of our country. The national wealth represented by these growing 

pools of assets should be managed with prudence, skill and efficiency to fuel new economic growth 

and prosperity for younger generations while providing a comfortable retirement for savers. People 

who are entrusted to make investment decisions or provide advice should have a high level of both 

expertise and ethics while also understanding the social implications of their actions.

Overwhelmingly, activities of financial intermediaries who are in conflicted situations tend to reduce 

return for investors as a group, increase risk or both. This is especially true for those lacking expertise 

and ethics, those not interested in long relationships with clients and those motivated primarily by 

personal profits. Therefore, I support the new Fiduciary Rule proposal from DoL as it can help reduce

conflicts of interest.

However, even with the implementation of the new rule, the financial industry and the investment 

management sector would still be a long way off from having what would be considered normal 

consumer protection safeguards in other industries of similar importance such as accounting, 

medicine or architecture.

Reliance on the traditional approach of more disclosures and more regulations may address some 

issues but can potentially exacerbate the problems in the current framework by adding even more 

complexity. What is needed is an emphasis on professionalism and professionals. In the investment 

management industry there is a need for different types of professionals with different skills. Within 

each profession, there is often a need for specialization.

The “professionalization” of investment management would succeed where regulation fails. By 

definition, professions require a high degree of education, training and conduct conforming to a 

rigorous code of ethics. Professionals who are “fiduciaries” must act in the best interest of the client. 

They should not receive compensation from those selling products or wishing to influence the advice 

given.
Being a fiduciary necessarily means being a member of a formal profession. The current definition of a 

fiduciary for investment advisers is incomplete as it mentions only prudence and loyalty. Acting in the 

best interest of the client as a fiduciary must require a high level of professional competence and the 

existence and adherence to a code of ethics. 

By definition, salespeople cannot be fiduciaries. Therefore, the idea of imposing a uniform fiduciary 

standard for broker-dealers and investment advisers is impossible and, if implemented, doomed to 

create widespread institutionalized deception. 

A rational approach would be to follow the model of the healthcare industry where performing 

medical procedures or recommending treatment with drugs that can be potentially harmful is done 

only by licensed physicians. In the investment management industry, investment advisers should be 

highly qualified professionals, compensated solely by clients, making prudent recommendations 

based on the best professional practices and a code of ethics. Lawmakers and regulators should apply 

this model by recognizing certain professions, setting up accreditation organizations, administering or

monitoring the examinations, issuing licenses and ensuring that those who practice are only licensed 

professionals. In the end, this would result in a higher quality of service, less regulation and less 

litigation. It would also contribute to an increase of trust in the industry and in the government 

regulators.

Background 

Consumer protection is generally a government function that relies on regulation and enforcement. It 

covers both products as well as services but the approach is different for each. In the case of products, 

regulation typically attempts to prevent the sale of those that are harmful or unsafe. For some 

categories of products such as automobiles and other durable goods, laws also ensure a level of 

quality by mandating warranties or recalls. 

For services, the main consumer protection tools are licensing, mandatory insurance, bonding and 

litigation. The first line of defense for ensuring a proper quality of service and preventing harm done 

by service providers is professional licensing. There are many formal professions such as physicians, 

lawyers, accountants, architects, engineers, plumbers, etc. In cases where customers are still harmed, 

litigation, bonding and insurance provide an additional safety net. 

The investment management industry offers both products and services. Unlike the regulation of 

normal products, investment products such as securities, funds, etc., due to their nature, have no 

government-mandated safety or quality requirements. A strong emphasis and reliance on disclosure

produces long and complex documents that are virtually impossible for individual investors to 

understand and analyze. This automatically creates the need for a competent, unconflicted and 

ethical advisor who is a service provider.

However, when it comes to investment management services, government’s approach to consumer 

protection is vastly weaker than other industries. Whereas licensing requirements for other 

professions are very high and rigorous, investment management is not even recognized as a formal

profession. This is evident from the fact that, depending on state, nearly anyone can be a licensed 

“Registered Investment Adviser” or RIA. 
Some states have certain education requirements. For example, in NY, an RIA representative must 

have either a Series 65, a Series 7 and 63 or have a designation such as CPA, CFP or CFA. Other states 

such as Georgia have no education or testing requirements. Wyoming does not even require 

registration at all. Most states allow investment advisers to operate without being registered if they 

have less than six clients. We must wonder if it would be acceptable to practice medicine without a 

physician license if someone had less than six patients in each state. College level education, or any 

level of education, is not necessary in all 50 states. This is because even requiring Series 65 does not 

require having a college diploma. 

To make matters worse, investment advice is often given by salespeople such as broker-dealer 

representatives or insurance agency reps presenting themselves and acting as financial advisers. 

Typically licensing for the sales-side only requires passing a Series 7, Series 8 or Life&Health Insurance 

examination. This poses several important problems related to consumer protection. First and 

foremost, the advice is inherently conflicted. Second, the costs tend to be either obscured or hidden 

making comparison-shopping difficult or impossible. Lastly, salespeople typically have no special 

qualifications to act as investment managers. Again, a college degree of any kind is not a requirement. 

Asking consumers to protect themselves by carefully selecting an “adviser” is a utopian idea that fails 

in real life. We know that to be the case when we find that most investors are unaware of the most 

basic facts, which include understanding the difference between a salesperson versus an adviser and 

being able to identify who they are dealing with. Having dually-registered representatives blurs the 

line even more for clients as it becomes difficult to know the capacity in which the agent operates at 

any given time.

Another potential tool at the consumer’s disposal is the existence of professional designations. 

However, this also poses problems in practice for the consumers. As evidence, there is a list of about 

150 designations as published by FINRA and making sense of them is difficult if not impossible. Very 

few designations rise to the level of profession by having extensive education requirements, a prior 

college degree, rigorous examinations and a code of ethics. Others are little more than the equivalent 

of a safe-driving course where the requirement is simply attendance in person or remotely. 

Interestingly, FINRA refers to all designations as “professional designations” when in fact the vast 

majority would not be even remotely seen as formal professions.

Putting all designations on an equal footing not only adds to the confusion but diminishes the value of 

any true professional designations. A consumer might be further misled by the name of the 

designation. For example, a designation name including the words “retirement specialist” would 

probably sound more powerful and relevant than another one that has the words “chartered” or 

“analyst”. 

Furthermore, even the most valuable designations are not an indication of whether a person is acting 

as a fiduciary or not and therefore qualified to give advice. Often, individuals holding designations 

work in a sales capacity being inherently in a situation of conflict of interest. Still, not being a fiduciary 

doesn’t mean that the person is acting without ethics. 

Increasingly various types of companies and different kinds of professionals are branching into the 

investment management business by leveraging their existing client base and their trust relationship 

with those clients. With low or non-existent barriers of entry, depending on the state, it is very easy 
for an accountant or a lawyer to register as investment adviser. This is further evidence that currently 

investment management is not a profession and that fiduciary standard for investment management 

is flawed. 

Accounting as a true profession does not permit non-professionals to give accounting advice. The 

same is true for legal advice or other types of professional advice. The mere fact that someone is a 

professional in one field should not be a qualification to practice in a different field. In fact one 

professional code of ethics of plumbing engineers is specific in stating that its members should not 

work outside their own area of expertise.

Current regulatory framework ignores the first line of defense in consumer protection by relying on 

professionalism and instead seeks to strengthen the liability and litigation aspects. This is not only the 

most inefficient and expensive form of consumer protection, it is also extremely unreliable as it can 

leave many victims without the means of possibility for redress. 

In conclusion, both government and industry need to start fundamentally rethinking their approach 

by moving towards professionalization. Ultimately, this would benefit not only the public but also the 

industry itself.