Never mind that it took many pages of regulation and lots of interpretation to explain what "fiduciary" meant in the new DOL iteration.  Never mind that even lawyers and financial professionals do not have a universal understanding of what the term means.  Never mind that the Commission felt it necessary, at the same time it proposed Regulation Best Interest, to propose an interpretive release "to address in one release and reaffirm - and in some cases clarify - certain aspects of the fiduciary duty that an investment adviser owes to its clients under section 206 of the Advisers Act."[14]  We may not have even gotten the interpretation right yet.  In fact, I take issue with one important aspect of the proposed interpretation of an adviser's fiduciary duty.  The Commission states that the duty of loyalty component of an adviser's fiduciary duty requires the adviser to acquire "informed consent" from its clients to any material conflict of interest that could affect the advisory relationship.[15]  However, as authority for this position the Commission cites, not a court decision or other weighty legal precedent, but an Instruction to Form ADV.[16]  An early commenter raised other issues with the proposed interpretation.[17]  In short, the term fiduciary duty is not easy to define even within the advisory context. 

The term "fiduciary" has become such an oft-repeated mantra that I worry it will have the perverse effect of harming investors.  Investors are told repeatedly that all they need to ask is one simple question about their financial professional: Are you a fiduciary?  Suggesting that a single word assures you that the person with whom you are dealing will serve you well dissuades investors from asking the questions they should ask before choosing a financial professional.  It provides a false sense of reassurance to retail investors.

The word "fiduciary" is so powerful that some people seem to be assessing our proposed Regulation Best Interest solely based on the absence of the word in the new standard.  If we are not calling the standard fiduciary, it must not be good, in the minds of some.  Instead, we used another term, but one that also gives me pause-"best interest." 

The term "best interest" may not be as old as "fiduciary," but it is not new either.  It has been bandied about Washington over the last decade as if it were an incantation that could cure all that is wrong in the retail investor space.[18]  Just as the word "fiduciary" seems to carry with it mystical medicinal powers, so too-in some quarters-the term "best interest" is apparently imbued with special healing abilities.

As with the fiduciary standard, however, one has to ask: regardless of how nice it sounds, what does "best interest" actually mean?  The Commission spent hundreds of pages describing the new "best interest" standard, but it is not clear that people understand it.  We have yet to receive many letters in our comment file, but some of the most vocal critics are the same people who said that the current "suitability" standard is insufficient because it allows broker‑dealers to place their own financial interests ahead of those of their customers.[19]  The Commission now has proposed to require that a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer . . . ahead of the interest of the retail customer.[20] 

The critics remain unsatisfied, but the basis for their dissatisfaction seems to be that we have not used the favored "fiduciary" terminology. 

A bigger concern for me is that the best interest standard suffers from the same problem the fiduciary standard does-a term that is wonderful for marketing purposes, but potentially misleading for investors.  Just as "fiduciary" has been used to lull investors into not asking questions about their financial professional, so "best interest" runs the risk of becoming a term that encourages investors simply to rely on the fact that their best interest is being taken care of.  If we retain the term, we-as regulators-and you-as advisers and brokers-ought to make an effort to encourage investors to look beyond nice terms to the substance of what their financial professional is doing-or not doing-for them and how much she is charging.