Buried in Obama’s financial reform plan is a requirement to make stockbrokers act in the best interests of their clients (“fiduciary responsibility”).
This would replace the current conduct standard, which merely requires brokers not to stuff their clients accounts full of products they would be crazy to buy (“suitability”).
Most money managers and independent financial advisors have long been held to the fiduciary standard, which makes vastly more sense.
So this change is long overdue.
Jane J. Kim and Aaron Luchetti, WSJ: Many investors don’t even know the difference between the two standards, believing their brokers already are acting in their best interests.
But requiring brokers to operate under a fiduciary standard could force them to offer products that are less costly and more tax-efficient. They will have to disclose any potential conflicts of interest, such as any fees they may get for favouring one product over another. That could mean clients will be offered fewer proprietary products if the broker can find a lower-cost option elsewhere.
For example, a broker couldn’t put you in a mutual fund with higher fees — or one he gets a bigger commission for selling — if he could get a comparable fund with lower fees elsewhere, says Tamar Frankel, an expert on fiduciary law at Boston University School of Law.
The proposal addresses a long-simmering debate over how brokers and investment advisers, who have traditionally offered more financial-planning advice, are regulated.
For years, investment advisers — regulated by the Securities and Exchange Commission as part of the Investment Advisers Act of 1940 — have been held to a fiduciary standard, meaning that in serving the clients, they have to put their clients’ interests first. Brokers were excluded from that definition of investment advisers as long as they didn’t get paid special compensation for that advice, and gave it as “solely incidental” to their brokerage services.
But over the years, that distinction became more blurred as brokers held themselves out as financial planners, even as they continued to operate under the more lenient standards. Making matters more confusing is the fact that some brokers became dually registered, operating under a suitability standard when they are selling products, but under a fiduciary standard when doling out investment advice.
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