Editor's note: this the second part of a feature looking at the implications of the US legislation passed last week (now awaiting President Obama's signature).

While the Dodd-Frank financial reform bill is set to become law in a matter of days, the great fiduciary debate rages on.

Congress has given the Securities and Exchange Commission the authority to establish a fiduciary duty for brokers and dealers and modify the fiduciary standard for investment advisors.

But what the SEC will actually do at the end of its six month review period and how it will affect wealth managers and family offices is still uncertain.

“We have clearly advocated for the SEC to require anyone calling themselves an investment advisor to be subject to the Fiduciary Standard as defined in the Investment Advisers Act of 1940 and are supportive of the great work being done by The Committee for the Fiduciary Standard,” said Mel Lagomasino, chief executive of GenSpring Family Offices.

“Frankly, we think it is confusing for investors when different ‘advisors’ are subject to totally different standards and play very different roles; it makes it difficult for an investor to know who they are actually dealing with.”

But one of the industry’s most prominent senior executives took a contrarian point of view.

In an opinion piece first published on Thursday by Reuters, Tim Kochis, chairman and former chief executive of Aspiriant, wrote:  “I strongly believe that imposing a strict fiduciary standard on every firm and individual, in all circumstances, would be a big mistake.

“It is important to distinguish sales efforts, the execution of transactions and the brokering of trades from the giving of advice,” Kochis went on.

“Imposing a fiduciary duty (putting the client’s interest first) is unrealistic in the sales environment or when brokering an investment between two customers, one a buyer and one a seller. Where both parties are clients, which client’s interest must the financial institution put first?”

According to Kochis, “legislating a new regime where all financial services are fiduciary would be impossible to put into practice."

A “better solution,” he argues, “would be to require firms and individuals to affirmatively declare, with clear acknowledgement by the consumer, when they are acting not in a fiduciary role. Absent that, their activities would default to a presumption of fiduciary conduct. When appropriate, consumers would then be put on notice to be wary.”

Accordingly, some firms would need to install separate personnel, compensation systems, and even separate facilities “to avoid any misunderstanding about whether a fiduciary duty applies or not.”

Imperfect Solution

Handing off the decision to the SEC in the first place was “a complete abdication by Congress to set down a common standard,” maintained wealth management and family office expert Jamie McLaughlin.

"They had their opportunity and by doing what they did we will have an imperfect solution,” McLaughlin said.

In fact, he predicted that the broker-dealers and insurance companies would “outlobby” the advisor community and ultimately “prevail” when the SEC made its final decision.

Leslie Voth, president chief operating officer of Pitcairn, the Jenkintown, Pa.-based multifamily office, was slightly more optimistic.

“It remains to be seen what the SEC will do in imposing a fiduciary standard on the broker-dealer community,” Voth said. “We can only hope it is both enforceable and clear.”

Family offices are likely to now come under a new federal fiduciary standard, said John Duncan, principal for Chicago-based law firm Duncan Associates.

Noting what he described as the SEC’s  “historically rigid approach of narrowly defined and restrictive rules governing the institutions it supervises,”  Duncan pointed out that a new SEC fiduciary standard  is likely to influence state legislatures and judges who are defining fiduciary duties in other contexts, such as those of trustees.

“If that happens, substantial recent progress in obtaining greater flexibility for trustees, such as allowing conflicts of interest as long as they are disclosed and the results are not unfair, may be rolled back to some degree,” he said.

More Financial Planning Seen

Another potential consequence of a fiduciary standard is that advisors may be required to perform a financial plan in order to make optimal solution recommendations, said Sophie Schmitt, senior analyst for Aite Group, the Boston-based research firm.

“Financial planning yields a document that proves that advisors have analyzed a client’s needs, goals and financial situation,” Schmitt said. “This document could also list the products that clients and advisors ultimately agree to implement. This type of audit trail would be an effective way to ensure that advisors are offering products based on an in-depth understanding of their clients’ needs.”

The challenge with designing a fiduciary standard, she said, “will be in deploying one that the majority of advisors today can follow based on their skill-level and product knowledge, while still realizing a real improvement in the investment recommendations and advice they provide to clients.”