The “You” Test and the Fiduciary Oath

The Committee for the Fiduciary Standard has been working, quietly, behind the scenes, to educate the regulators and Congress on the benefits of holding advice-givers to a fiduciary standard.

At our 2018 Insider’s Forum conference, the current chair for the Committee for the Fiduciary Standard—Patti Houlihan of Houlihan Financial in Ashburn, VA—presented the Committee’s “Fiduciary of the Year” award to Harold Evensky, of Evensky, Katz/Foldes.  Afterwards, I was surprised at how many attendees came up to me afterwards and asked: “Bob, what, exactly, IS the Committee for the Fiduciary Standard?”

Apparently, many advisors don’t know that a group of very prominent professionals has been working, for the past decade or so, to help professionalize the profession, educate regulators and members of Congress about the benefits of working with somebody who pledges to act as a fiduciary, and generally lobby on behalf of the fiduciary standard of practice. 

The Committee was founded by Knut Rostad, who now happens to be chair of a similar organization—the Institute for the Fiduciary Standard.  The Committee’s origins go back to a conversation among a small group of prominent advisors and observers at the 2009 FI360 conference. 

“I was talking with Knut and Bob Clark (then a columnist at Investment Advisor magazine) and a few others about the crash,” recalls Kate McBride, who at the time was editor of Wealth Manager magazine, now CEO of FiduciaryPath, and was the Committee’s chairperson in 2017.  “Over dinner, we talked about how investors had been hurt, and the FPA lawsuit over the Merrill Lynch Rule, and brokerage firms providing advice without registering with the SEC, and everybody calling themselves an advisor,” she adds.  “We thought it might be helpful if there was a group who knew from personal experience how fiduciaries acted in practice, who could say to regulators that anybody who is providing advice to investors needs to do so as a fiduciary, and what that means in the real world.”

The Committee eventually collected 15 respected members of the profession who agreed to donate their time and energies to the cause.  A few years later, Rostad proposed that the Committee move from a volunteer organization to one that would accept corporate donations, and when the rest of the Committee preferred to contribute their services pro bono, he left to found his own fiduciary organization. 

Houlihan, who also served as 2000 chair of the CFP Board of Directors, says that the advocacy mission of the Committee is actually pretty simple.  “Our purpose is to get the fiduciary standard to be THE standard, under the ’40 Act, for anyone holding themselves out as advisors,” she says.  “Under the ’40 Act, brokers must register either with the state or the SEC unless their advice is solely incidental to the execution of a transaction,” she adds.  “We believe that if you’re giving advice, and advertising that you give advice the way the brokerage firms are doing, then it is no longer incidental, and their brokers should either stop giving advice or register and live under a fiduciary standard. 

“The law is already there,” she adds; “the SEC just has to enforce it.”

But how do you know when somebody crosses that “solely incidental” line and shifts from taking orders to providing advice?  Evensky has proposed a very simple distinction that any layperson can apply.  “I call it the ‘you standard,’” he says.  “If someone calls up their broker, and says, ‘I want to buy X shares of AT&T,’ no problem.  That’s a brokerage relationship.  If someone calls and says, ‘What does your firm think about AT&T as an investment,’ that is also a brokerage function,” he adds, and would be regulated under the ’34 Act. 

“But as soon as the broker says, ‘I think YOU should…’” says Evensky, “then that person should be considered an advisor and be held to a fiduciary standard.  As soon as that word ‘you’ pops up, it’s giving advice.”

Disinterested audiences

This is a message that members of the Committee have delivered, in person, at their own expense, to every SEC chairperson from Mary Shapiro to Jay Clayton, plus many of the SEC commissioners and key members of Congress.  The Department of Labor consulted with Committee members when it fashioned its now-famous DOL fiduciary rule (vacated last March by the U.S. Fifth Circuit Court of Appeals), and the Committee has drafted position papers on a variety of initiatives, including a scathing review of the new SEC Regulation BI proposal. 

Most recently, McBride and Ron Rhoades, assistant finance professor at Western Kentucky University in Bowling Green, KY, testified before the New Jersey Bureau of Securities about its budding initiative to impose a fiduciary standard on all who give financial advice in that state.  “They really understand the issues, and they are committed to proceeding,” Rhoades reports.  “I came away optimistic that New Jersey has the political will, and the brain power and intellectual grasp of the fiduciary standard, to come out with a very strong rule.” 

He also gives the bureau staffers credit for reading his (rather lengthy) 120-page comment letter.

Of course, not all visits have been warmly received.  “When you go to the Hill, you can tell immediately who is a Democrat and who is a Republican, by how they respond to your discussion of fiduciary,” says Houlihan.  “The Democrats will say, we agree with you, and we’re working on it.  The Republicans will say: we don’t believe everybody can afford fiduciary, and we think that there’s nothing wrong with sales and commission compensation, and you should stop straightening your halos, because you have conflicts too.”

“The SEC is heavily influenced by the other side,” adds Rhoades, meaning brokerage firms.  “In the current administration, you get a very guarded response, and you can see that they are not going to change their mindset.” 

Often, talking with staffers on Capitol Hill, Committee members would give earnest fiduciary-related testimony to a profoundly disinterested audience, and then have the staffers respond with talking points straight out of the brokerage lobbying playbook.  “In one instance, the staffer said that he didn’t feel the need to get fiduciary advice, and that the fiduciary standard didn’t make sense for institutions that take orders for trades,” says McBride.  “We have always said that we aren’t talking about brokerage functions like order-taking being fiduciary.  We’re talking about investment advice being fiduciary.”

At the other end of the spectrum, McBride reports that Elisse Walters, then an SEC commissioner under Mary Schapiro’s chairpersonship, reached out to the group and asked for clarification about the fiduciary standard.  “She was really interested,” says McBride.  “She said, we want to know what you’re doing.  It sounds really interesting.”

Sometimes the Committee staffers discovered, upon arrival, that they had to repair some damage.  Evensky recalls a meeting with Schapiro, and she brought up the fact that the CFP Board was calling on the SEC to regulate financial planning activities in the marketplace.  “She was asking us, what are they thinking?” he recalls.  “She said, we don’t have any authority to monitor or regulate those kinds of activities.  It was,” says Evensky, “on us to bring her back to the issues we were concerned about, but meanwhile we had to deal with some damage, in her eyes, to our profession’s credibility.”

Evensky adds that it seemed like every time he and a few other Committee members waited outside the SEC chair’s office, the door would open and out would come a dozen or more SIFMA representatives.  “They all looked like Brooks Brothers models, all dressed up and professional looking,” he says.  “It always felt like the independent advisor was completely outgunned in Washington.”

Rhoades, however, believes that there is some value in the fact that the Committee is routinely advocating changes that are not necessarily in the best interests of the Committee members, personally, or, more generally, the fiduciary advisory community.  “The status quo really benefits true fiduciary advisors,” he says.  “It is so easy to take business from most brokerage firms at this point, and roughly any insurance agent.  All you have to do is explain to the prospect what they’re currently paying.  We’re asking for the fiduciary standard to be applied because every day, we see how our clients, and friends and neighbors have been taken advantage of.  We want higher principles to apply to our profession in order to benefit all Americans, even though this would not be the best outcome for our own businesses in the long run.”

The Oath

Evensky describes himself as the skeptic on the Committee.  “I don’t think we’re ever going to get anywhere with the regulators or Congress,” he says.  “I’m not sure that the people in Congress really care.”

His role on the Committee is to educate his press contacts on what the fiduciary standard really means, and how it could benefit the world at large.  But he is also largely responsible for the wording of the “Oath” that is published on the Committee’s website—you can find it here:  Any advisory firm can register as a “committed firm” to the oath, meaning that they will sign and deliver it to their clients.  (You can “commit” at the same link, and your firm will be added to the website’s list of “committed” firms that consumers can search for.)

Of course, any firm signing the Oath might also, as a followup, tell prospects or clients to take the Oath to any brokerage firm office and invite that broker who is competing for their business to sign it as well. 

You know the response: “My compliance team would never allow me to pledge that I will act in your best interests.”  This creates possibly the clearest red flag that a consumer will ever get when searching for financial advice.

The Oath fits easily on one page, in large type.  Interestingly, it only uses the word “fiduciary” once, and it doesn’t require you to be fee-only (although you could argue that “avoiding conflicts of interest” would require someone to avoid the conflicts associated with commission compensation).  Instead, the Oath lists obligations:

I believe in placing your best interests first.  Therefore I am proud to commit to the following five fiduciary principles:

I will always put your best interests first,.

I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.

I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.

I will avoid conflicts of interest.

I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

The Committee has also developed one of the clearest explanations of the difference between best interest/brokerage and fiduciary/advisor obligations, and what this means to consumers.


Can the Committee members see any progress for the decade of work they’ve put in?  Rhoades points to the DOL Rule was at least a temporary victory, which not only caused brokerage firms to adjust their models, but also may have forced the SEC to finally address the fiduciary mandate in the Dodd-Frank Act.  The Committee has submitted comment letters, coordinating dozens of consumer groups, recommending that the SEC abandon the broker-friendly disclosure language in the proposal for something tougher and clearer.

Meanwhile, Rhoades is encouraged by the potential impact of the New Jersey fiduciary initiative.  “It could serve as a model for other states,” he says.   “If New Jersey created fiduciary rules, it could form the basis for NASAA to examine a model fiduciary regulation at the state level.”

That, in turn, would put pressure on the SEC to abandon its brokerage-firm-friendly regulatory approach.  “There is regulatory competition out there,” says Rhoades.  “The SEC might not want the states to impose stronger regulatory standards than it does.”

What about Congress?  Rhoades says that the Republican leadership has largely—with a lot of nudging from Wall Street—framed the fiduciary debate as added regulation.  But he believes that a different framing might win hearts and minds—and votes—sometime in the future. 

“Right now, a lot of people who really need it don’t get financial advice,” says Rhoades.  “They don’t know who to trust, so they don’t want to take the risk.  We need better financial advice to encourage saving; you can’t invest if you don’t save.  We believe that once financial advisors are trusted, the demand for financial advice will soar,” he adds.  “People will accumulate greater capital, which would lead to greater economic growth.  As more people save for retirement, the burden on governments would be less.  The societal positives of transforming this trade or industry into a profession far outweigh the narrow parochial interests that have dominated the debate so far.”

The best way for advisors to support the Committee is to sign on as a “committed firm” to the Oath, and share it with clients, and invite them to share it with their friends and neighbors.   “I think nothing is going to change until consumers, by the thousands, start bringing the oath to brokers and asking them to sign it,” says Evensky.  “If they get a lot of those requests, and they start losing business, then you might see a change of heart. 

“I emphasize the word ‘might,’” he adds.  “All we can do is put it out there and make the distinction as clear as we can.”