‘Best interests’ and ‘fiduciary’ aren’t the same, so which will the SEC choose?

It could become a flash point that goes beyond semantics.

We’re now into the second quarter of the year, and everyone involved in the debate over investment advice standards is eagerly awaiting the Securities and Exchange Commission’s fiduciary rule proposal.

Oops. Like Britney Spears, I did it again. I referred to the pending SEC rule using the term “fiduciary.” As sources have pointed out to me, the SEC proposal may not emphasize that word — or even mention it much.

Part of the definition of “fiduciary” is to be legally bound to act in another person’s “best interests.” But the SEC proposal could hinge on how the agency defines best interests.

“That’s the $1 million question,” said Knut Rostad, president of the Institute for the Fiduciary Standard.

Investment advisers are currently held to a fiduciary standard of care, while registered representatives must adhere to a suitability standard. The latter requires that investment products meet the objectives and risk tolerance of a customer, among other factors, but allows brokers to recommend a product that gives them the highest revenue.

You will be hard pressed to find anyone in the struggle to set advice standards who doesn’t wholeheartedly back a rule that requires brokers to act in their clients’ best interests. It reflects the fact that “best interests” and “fiduciary” have melded over the years.

Fiduciary duty principles have been developed in common law, court and SEC opinions, according to Mr. Rostad.

“Yet, ‘best interests’ has also come to mean fiduciary, in some legal opinions and in the public mind,” he said.

Acting in someone’s best interests also has been linked to suitability, according to Neal Shikes, owner of MJN Fiduciary, a consulting firm.

But a key differentiator between suitability and fiduciary are the duties of loyalty and prudence, as well as the liability attached to a fiduciary standard.

“Best interests” is fungible.

“It’s a term that can be danced around a lot,” Mr. Shikes said. “It depends on who’s saying it.”

Different regulators say it differently.

“We all talk about fiduciary like there’s a ‘the’ in front of it,” said Skip Schweiss, managing director of adviser advocacy and industry affairs at TD Ameritrade Institutional. “There’s no one standard.”

Indeed, the partially implemented Labor Department fiduciary rule takes one approach that has been strongly opposed by financial industry groups, such as the Securities Industry and Financial Markets Association.

In its own proposal, SIFMA emphasizes “best interests” rather than “fiduciary” in a standard that is based on the existing suitability rule.

Fiduciary advocates worry that a best-interests standard will center on disclosure. One way for the SEC to thread the needle is to maintain the status quo for investment advisers while formulating a new standard for brokers.

“This may be the grand compromise,” Mr. Rostad said. “Yet a ‘best interests’ label must come with material upgrades from suitability and title reform with meat. Otherwise, it’s suitability plus.”

Title reform, or drawing lines of demarcation about who can call themselves “financial advisers,” is likely to be part of the SEC proposal. But it will have to address the fact that many brokers also are investment adviser representatives.

“That makes it a challenge for the SEC to come up with some kind of title clarity,” Mr. Schweiss said.

That leaves us all waiting on the SEC.

“How much daylight is there between ‘best interests’ and ‘fiduciary’?” Mr. Schweiss said. “We’ll see with the SEC proposal.”

He didn’t call it the “SEC fiduciary proposal.” I’ll have to adopt the same discipline.