The debate over a new level of
protection for investors in their dealings with brokers may finally be nearing
a resolution. And some investor advocates worry about the direction it seems to
The debate centers on whether
brokers should be required to act in the best interest of their clients when
giving personalized investment advice, including recommendations about
securities, to retail investors.
interest" standard is known as a fiduciary duty. Financial advisers
registered with the Securities and Exchange Commission already are held to this
standard. But brokers for the most part are held to a different standard, of
"suitability," which requires them to reasonably believe that any
investment recommendation they give is suitable for an investor's objectives,
means and age.
The Dodd-Frank Act, signed into law in 2010, directed
the SEC to study the matter, and permits the regulator to establish a fiduciary
standard for brokers. In late February, SEC Chairman Mary Jo White said the commission would make a
decision by year-end.
Meanwhile, the Labor
Department is working on a separate proposal that could establish a fiduciary
standard for brokers who give advice on retirement investing. It hopes to offer
a proposal by August.
Advocates of a fiduciary
standard for brokers argue that investors don't understand the current rules.
That leaves the door open to abuses by brokers intent on selling products that
pay them a commission, whether those investments are the best option for the
buyer or not, these advocates say.
The problem with the
suitability standard is that "you can satisfy a suitable recommendation by
recommending the worst of what's suitable," says Barbara Roper, the
director of investor protection at the Consumer Federation of America. "If
a variable annuity is suitable, you can recommend a variable annuity offered by
a shaky insurer with sky-high fees and poor investment choices."
But applying the
fiduciary standard to broker-dealers as it is now applied to investment
advisers would add to brokers' compliance and liability costs, with no
certainty of additional protection for investors, says Gary Sanders, vice
president of securities and state government relations for the National
Association of Insurance and Financial Advisors in Falls Church, Va.
Critics also say a universal
fiduciary standard would narrow the range of products brokers could offer, by
limiting their ability to recommend investments that earn them a commission. At
the least, some in the brokerage industry say, any fiduciary standard for
brokers should be more flexible than the one investment advisers now operate
Some fiduciary-standard advocates
are worried, however, that regulators are heading for a middle ground that
these advocates fear will fall far short of what's needed.
"The concern is that
the argument of the [brokerage] industry has been generally accepted,"
says Knut Rostad, president of the Institute for the Fiduciary Standard.
"If that's the case, then to proceed, we will have the worst of all
possible worlds. We will have a situation where every single broker and adviser
will be able to say they're a fiduciary, when the rule making would essentially
be a commercial sales standard with a little bit of extra disclosure
for the original article in the Wall Street Journal.