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It’s High Time To Put The Investor First And Create A Fiduciary Standard For Brokers

August 25, 2014 Blog

There’s a simple universal rule in business: “put the customer’s interests first.” Remarkably, this tried and true maxim does not apply in the world of investment recommendations to customers.

In the 2008 legislation called Dodd-Frank, which followed the financial crisis, Congress authorized the Securities Exchange Commission to pass a “fiduciary duty” rule, which would require that stockbrokers put their customers’ interests first – what a novel idea.

Apparently, lobbying by the securities industry has stalled and possibly killed the passage of any such rule. In other words, say goodbye to the idea of Wall Street ever putting the customer’s interests before the house’s desire to generate fat fees.

As Chuck Jaffe of MarketWatch noted recently, the “House of Representatives passed a budget that bars the SEC from imposing a fiduciary standard on brokers-dealers during the federal fiscal year beginning October 1.”

Score one for the Street.

Jaffe also notes that the Department of Labor, which had been looking at a fiduciary rule to govern financial advisors who manage individual’s retirement plans “has had several stalls of its own, most recently saying it would not re-propose fiduciary rule in August, delaying any new motion until 2015.”

Score two for the fat cats.

After destroying retirement savings of investors in the 2000 tech bubble crash and the 2008 financial crisis, why would Wall Street not want to have a standard that requires stock brokers and financial advisors to put investors’ interests first? Indeed, Wall Street is digging its heels in and placing its desire to make a commission from a hot product like a souped-up variable annuity or an illiquid real estate investment trust before the financial well-being of clients.

Perhaps Wall Street is concerned about potential liability from investment fraud attorneys filing cases under the higher fiduciary standard, rather than the current suitability rule. That industry guideline purportedly requires financial advisors simply to make sure that the product is appropriate for the customer’s needs and risk tolerance at the point of sale.

Under the suitability standard, as opposed to the fiduciary duty rule, advisors are not required to put their customer’s interests first. That disparity in customer care, or putting the customer first, allows Wall Street firms to push homegrown products which pay them higher fees regardless of whether it’s the best product for investors.

Further clouding the potential implementation of a fiduciary standard across the 300,000 brokers who are licensed to sell stocks and bonds and investment products like mutual funds is that a fraction of them, less than 10%, already work as fiduciaries. There are 20,000 or so registered investment advisers – RIAs – who are registered with the SEC, earn a fee for giving advice instead of a commission for selling a product, and work under a fiduciary standard.

This disparity is confusing for investors, who are trusting and often believe their broker is working for their best interests. What’s more, the differences between a broker under the suitability rule and a fiduciary advisor are stark.

A broker with a Wall Street bank sells a product. An SEC registered RIA acts as a fiduciary; instead of forcing one product down the customer’s throat, the RIA is required as a fiduciary to find the best investment that fits the client’s appetite for risk and return. The RIA typically performs an in depth analysis of the potential cost and returns of the investment over a five to ten year period for the client.

It’s time for the SEC to flex some muscles and show that they really have put the consumer’s interests first. We need to see if the current SEC can withstand the ferocious lobbying effort or whether the fiduciary standard rule can will get kicked further down the road. What’s more, it’s time to get a fiduciary standard of care in place before the next financial meltdown hits and further erodes investors’ confidence in Wall Street.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions.