23 July 2019

Ruling Near on Fiduciary Duty for Brokers

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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 be taking.

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.

The "best 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 under.

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 requirements."

Click here for the original article in the Wall Street Journal.

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