In the wake of investor losses and devastating Ponzi scandals,the new power in Washington has shown a recent zeal for financial services regulation. They are focusing on the oversight of those who provide financial advice, and it's reigniting the debate surrounding the level of care that advisors should meet.

At the heart of this debate lies a contentious word: fiduciary. In essence it means that advisors who fall under the fiduciary standard, namely investment advisors who run a fee-based business, must always put clients' interests before of their own. This generally means recommending the lowest-priced product that meets the client's needs and disclosing all conflicts of interest. On the other hand, broker-dealer registered representatives must meet a "suitability" standard of care. As the name suggests, this standard requires the advisor only to make "suitable" recommendations to his clients. That means the product he recommends doesn't necessarily have to be the cheapest available, and he's free to choose a product based on the amount of commission he is paid for selling it, provided it is indeed suitable for the client.

The current debate is whether all advisors should be required to meet the fiduciary standard, or whether everyone should fall under a suitability standard. Ever since a federal appeals court overturned the so-called "Merrill Lynch rule" exempting fee-based brokers from the strictures of the Investment Advisers Act of 1940, the issue has become even more contentious.

In the Fiduciary Corner...

The investment advisor side of the industry is calling for all advisors to be brought under the fiduciary standard. "Investment advisors think: 'We're already stuck with this (fiduciary) standard, so everyone should be,'" says Shane Hansen, an attorney specializing in the securities industry and a partner at Grand Rapids, Mich.-based Warner Norcross and Judd. "They really want brokers to be brought up to the same standard."

In testimony before the Senate Committee on Banking, Housing and Urban Affairs in March, David Tittsworth, executive director of the Investment Adviser Association, called for Congress to extend the fiduciary standard to all individuals offering investment advice. "Surely we can agree that, in the current climate, there must be no weakening of investor protections. We therefore urge you to resist the call to water down the standards applicable to advisory activities and instead extend application of the fiduciary duty to all those engaged in advisory services," he told the Committee.

Tittsworth's argument is supported by the Financial Planning Association, which represents fee-based advisors, the North American Securities Administrators Association, which is an association of state regulators who oversee investment advisors with less than $25 million in assets under management, and the Consumer Federation of America.

Duane Thompson, the managing director of FPA, says he sees a clear trend towards the acceptance of a universal fiduciary standard. He points to the Certified Financial Planner board's decision to require any advisor with the CFP designation who provides financial planning services to clients to act as a fiduciary, whether they are registered representatives or investment advisors. This designation, he says, is also valued by the wirehouses and they've provided financial incentives to encourage their advisors to obtain it.

...And in the Suitability Corner

The Securities Industry and Financial Markets Association, the industry's lobby group, is the leading opponent to the universal fiduciary standard. In his testimony before Congress, SIFMA's president and CEO, Timothy Ryan, agreed that all advisors should be brought under one regulatory standard but said that labels like fiduciary and suitability confuse the investing public. Instead, "SIFMA recommends the adoption of a 'universal standard of care' that...expresses in plain English, the fundamental principles of fair dealing that individual investors can expect from all of their financial services providers," Ryan told the Committee.

What this "universal standard of care" would mean in practice remains unclear. It provoked an outcry from the pro-fiduciary camp, which feared that it would lead to a watering down of the fiduciary standard and simply hold advisors to a duty of "fair dealing."

But if you move out of the Beltway to the advisors on the frontlines, you'll find plenty of confusion as to how a fiduciary standard could be applied to a commission-based business.

Paul Tolley, the chief compliance officer for Waltham, Mass.-based Commonwealth Financial Network, says a number of details need to be explained. "There's nothing wrong with a commission-based business," Tolley says. "It serves a purpose in our industry," he adds. "But there's an inherent conflict when someone earns a commission on sales that makes it difficult to apply a fiduciary standard."