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Important reading on broker dealer obligations or lack of them...

Jason Zweig's article in the WSJ, Brokers Win, Investors Lose Key Reform is an important read for those who wish to understand the actual risks of dealing with the broker/dealer community on an uninformed basis. However, I found Jan Sackley's comments on the article compelling, and I present them in whole below (with some nominal formatting changes).  For my thoughts see Comments below for this posting or go here.


The question on the table is whether or not Congress should require that individuals and firms that hold themselves out as providing financial advice to investors and others who seek financial management assistance (remember that some people do not "invest" in any securities but still require financial advice), should be held to a fiduciary standard so that the citizenry can be assured of a certain level of objectivity and professionalism untainted by the financial reward to the adviser.

If such a requirement is adopted, today's brokers could not be called "advisors", "consultants", or other titles that imply to the average consumer that the broker is an objective advisor. Rather, the broker should be correctly perceived by the public as a seller of products and services as a representative of his or her firm, and an insurance agent as a seller of insurance policies and annuities.

In contrast, the fiduciary-advisor is the customer of the brokers and agents. The fiduciary-advisor utilizes the services of brokers to fulfil their client’s wishes with respect to the purchase or sale of investment products. Or, the client could make his or her own selection of which broker or agent to use to buy (or sell) securities or purchase insurance products. The fiduciary-advisor and the broker should not be one and the same professional in a client relationship.

In other words, brokers and insurance agents would provide for the execution of trades or sell products to fiduciary advisors and individual consumers as their customers. If a fiduciary advisor is in the picture, they are an intermediary working on behalf of the consumer. Or, the consumer who does not want to pay an advisor for advice could go directly to the broker to have their transactions executed. It should be made clear to these consumers that the broker is not responsible for the consumer’s investment choices nor for the ongoing monitoring of those choices.

The concept of a "single" or "uniform" fiduciary standard implies that some regulator could simply author rules that are the “be all and end all” for fiduciaries. This misunderstanding is inconsistent with the reality that acting as a fiduciary is a behavioral concept, not a rules concept. Yes, there are certain guidelines that are articulated in regulations (and some statutes) from those agencies that regulate financial institutions that provide fiduciary services. Examples include

and, of course, SEC rules for registered investment advisors. In addition, Erisa fiduciaries must comply with both IRS and DOL rules on fiduciary behavior. States have statutes and rules as well.

In spite of all of these rules, all of the banking regulators (the states, FDIC, OCC and OTS) expect bank fiduciaries to act (behave) in accordance with common law principles, including those articulated in Scott on Trusts. I am not convinced that the SEC has this same expectation, or conveys it adequately in their rules, but that is a separate issue. Common law principles are often the decisional measures when a case is adjudicated, whether the "fiduciary" is a bank, a registered investment advisor, an executor of an estate, or any other financial fiduciary.

The debate about brokers possibly being held to a fiduciary standard must recognize that the business model followed today by brokerages is not consistent with common law fiduciary principles. The questions about commissions and proprietary products are non-starters; fiduciaries do not "sell" and thus do not (or should not) earn commissions. Proprietary products fall under the well-established Duty of Loyalty: mitigation requires full disclosure and well-informed consent, a specific statutory exemption, or a regulatory exemption that has been thoroughly vetted and open to comment.

It is puzzling why certain members of Congress do not want to provide our citizens with the comforting knowledge that someone called an “advisor” or a “consultant” is expected to put the customer’s needs at the forefront without any conflict created by compensation methods. Of course there will always be bad fiduciary apples, but at least the barrel would have a consistent framework.

Jan Sackley, Principal
Fiduciary Foresight, LLC
Risk Management and Regulatory
Compliance Consultants


Reproduced with the permission of the author, for which we are grateful.


Reader Comments (1)

Thanks, Jan, for the professionalism and concision of your comments. I would encourage all investors to read them. I would supplement one point, however:

"It is puzzling why certain members of Congress do not want to provide our citizens with the comforting knowledge that someone called an “advisor” or a “consultant” is expected to put the customer’s needs at the forefront without any conflict created by compensation methods."

It is not puzzling at all, it's an old story, and we need just follow the money.

To effect a transfer of wealth from the retail sector to themselves, the broker dealer community needed the body of regulation to deliver two outcomes 1) the ability to operate under the safe harbor of the 'suitability' standard or 'incidental' advice so they could subordinate their clients' interests to their own revenue preferences and 2) the ability to not disclose that outcome or to operate with same effect.

Congress simply monetized its ability to regulate and delivered the goods (there are less delicate ways of putting it). It is clear that most retail investors have no clue about the important differences between fiduciary and suitability standards, and that evidences a profound regulatory failure ... one that has served the vested interests of broker dealers and ill served retail investors.

Sunshine is the best disinfectant, and proper disclosure and investor education would solve this problem.
March 2, 2010 | Registered Commenterhb

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