Gary Karz, CFA
Host of InvestorHome
Founder, Proficient Investment Management, LLC

Links

• SEC Study on Investment Advisers and Broker-Dealers January 2011
• Statement Regarding Study On Investment Advisers And Broker-Dealers by Commissioners Kathleen L. Casey and Troy A. Paredes (1/21/2011)
• FI360 Blog/InvestmentNews | InvestmentAdvisor | FinancialPlanning (articles below)
• Morningstar Fiduciary Focus columns by W. Scott Simon

Background

On January 22, 2010 the SEC issued it's report in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The SEC's mandate was to resolve differences between the suitability standard that Stockbrokers (aka Registered Representatives) are held to and the fiduciary standard that Registered Investment Advisors (RIAs) are held to. The report continued a debate that has gone on for decades (for instance, see Can You Trust Your Broker? from BusinessWeek - 2/20/95).

Elizabeth Ody wrote a thought provoking summary of the then pending SEC decision in the December issue of Kiplinger's. She directly asked the question Whose Advice Can You Trust? in the title and notes in the subtitle "The feds want to level the playing field between brokers and advisors. It may not make a difference." Her article begs the question of whether we should expect the SEC's decision to resolve the current issues. One critical issue revolves around the current situation whereby Stockbrokers can have two hats (one broker hat and one advisor hat). The standard they must meet depends on which hat they wear. Stockbrokers are relatively easy to identify because they are required by law to identify themselves with the phrase “Securities offered through (firm name).”

When Stockbrokers are not providing financial advice, they can wear the broker hat. By providing products that are suitable, but possibly not in the client's best interest, Stockbrokers are often placed in situations which create conflicts of interest with those clients. Research (cited below) consistently finds that investors are confused regarding current regulations and standards for investment professionals, mistakenly believe investment professionals have their best interests in mind, and the industry takes advantage of the environment to make more money from investors. Troubling research findings include the following.

• Most investors can't differentiate between types of investment professionals (source)
• Most investors mistakenly believe their brokers have to have their best interests in mind (source)
• Most consumers mistakenly assume insurance agents must act in their best interests (source)
• Most investors believe all investment providers should have a fiduciary responsibility, which is not currently the case (source)
• The industry has become more adept at segmenting customers by level of investment sophistication and load mutual fund companies take advantage of this ability and charge higher expenses to their target customer: the less knowledgeable investor (source)
• Relative to direct-sold funds, broker-sold funds deliver lower risk-adjusted returns, even before subtracting distribution costs (source)
• After learning about the differences between a brokerage account and an advisory account, 79% of investors said they would be less likely to go to a brokerage firm for financial advice (source)
• Even after researchers explain fiduciary duty and suitability in plain language, respondents struggled to understand the differences between the standards of care. Even after explaining that a fiduciary duty is generally a higher standard of care, focus-group participants expressed doubt that the standards are different in practice (source)

There is a long list of reasons why investors should be on guard regarding interaction with a Stockbroker given the gap between the suitability and fiduciary standards. In particular, when a stockbroker moves from one firm to another the stockbroker may have entered into an agreement with the new firm that pays them upfront out of future earnings they are expected to generate from their clients. How often does that happen? According to InvestmentNews At least 206 teams of advisers — managing a total of $68.3 billion in client assets — moved to another company or created a new firm in 2010. They keep a running list of Advisers on the Move including Assets Under Management and Trailing Twelve Months "production." We know that the SEC is evaluating these agreements and appears to be imminently planning to issue new rules to prevent abuse (see articles below). See also 3 Strikes - Advisor Warning Signs.

Sadly, what you are unlikely to hear in articles about Stockbrokers switching firms is how the client portfolios of those Stockbrokers performed. The focus is generally on how much money the Stockbrokers made for themselves and their firms, which by definition comes out of their clients' returns. Another potential problem the SEC is evaluating is the question of whether Advisors that move have an incentive to boost their "production" just prior to the move to get a stronger package.

How much is it worth to the brokerage industry to not have to meet a fiduciary standard? Since many of the brokers are public companies, we can actually get a good estimate from the analysts at some of those brokerage firms that are trained in making those kind of financial projections. There is one estimate in Trusted Adviser or Stock Pusher? Finance Bill May Not Settle It from the NYTimes (3/3/2010), which includes this very telling note - "Guy Moszkowski, a securities industry analyst at Bank of America Merrill Lynch, said that the impact of a fiduciary standard was hard to determine because it would depend on how tightly the rules were interpreted. But he said it could cost a firm like Morgan Stanley Smith Barney as much as $300 million, or about 6 to 7 percent of this year’s expected earnings, if the rules were tightly defined." So if you extrapolate to other public brokerage firms, it's easy to speculate that the brokerage industry makes $billions annually and brokers themselves make $billions more taking advantage of their option to sell their clients higher cost "suitable" products that may no be in their clients best interest.

Articles

• Department of Labor Making a Mistake in Foregoing Fiduciary Standard by Larry Swedroe (10/31/2011)
• Protecting Investors—Establishing the SEC Fiduciary Duty Standard from AARP (September 2011)
• Safeguards Are Scant as Ranks of Registered Investment Advisers Swell 39% By Elizabeth Ody in Bloomberg (7/6/2011)
• A Higher Standard for Brokers -- But Not Yet from Kiplingers (April 2011)
• SEC: Advisers should serve financial consumers, not themselves from Consumer Reports (1/26/2011)
• SEC Study Sees Common Standard for Brokers, Advisers from the WSJ (1/22/2011)
• Whose advice can you trust? from Kiplinger's (December 2010)
• FINRA Urges SEC to Create SRO for Investment Advisers Amid Fierce Debate Spurred by Dodd-Frank Study from Wolters Kluwer (11/9/2010)
• Excessive 401(k) Plan Fees and Costs Case Goes to Trial (November 2010) from Reish & Reicher - "the court concluded that the fiduciaries breached their duty of prudence in offering the retail share classes."
• DOL’s Proposed Changes to Definition of Fiduciary: Significant Impacts for Financial Companies and Plans from Stroock (10/28/10)
• Jane Bryant Quinn at Moneywatch
  • Will the SEC Force Your Broker to Behave? (1/26/2011)
  • Should You Trust Your Broker? No, and Here’s Why (9/7/2010)
  • Financial Reform Bill: Investor Protection Gets Knocked Out (6/24/2010)
  • Stop Senator Collins! She Wants to Cut a Key Investor Protection from the Reform Bill (5/17/10)
  • Will Brokers Have to Put Your Interests First? (5/5/2010)
• Financial Industry To SEC: No Fiduciary Standard, Please from Financial Advisor (9/1/2010)
• Old foes in the fiduciary debate join new battle to sway SEC's six-month study (8/30/2010) and Improbable win for fiduciary standard from RIABiz (6/25/2010)
• Investors Misled By Brokers Masquerading As Fiduciaries from Forbes (08/09/10)
• Does Your Advisor Have Your Best Interests at Heart? from Larry Swedroe (5/1/9)
• Holding Brokers To a Higher Standard (5/15/10) and The Fight Over Who Will Guard Your Nest Egg (3/28/9) from Jason Zweig in the Wall Street Journal
• Trusted Adviser or Stock Pusher? Finance Bill May Not Settle It from the NYTimes (3/3/2010)
• Struggling Over a Rule for Brokers from NYTimes (2/15/2010) - At issue is whether brokers should be required to put their clients’ interest first — what is known as fiduciary duty. The professionals known as investment advisers already hold to that standard. But brokers at firms like Merrill Lynch and Morgan Stanley Smith Barney, or those who sell variable annuities, are often held to a lesser standard, one that requires them only to steer their clients to investments that are considered “suitable.” Those investments may be lucrative for the broker at the clients’ expense. Consumer groups say the issue has already been examined, most recently in 2008, when the Securities and Exchange Commission asked the RAND Corporation, a nonprofit organization, to study the business practices of broker-dealers and investment advisers. The study found that investors had trouble distinguishing among industry professionals. The insurance industry, however, is opposed to any additional regulation. Mr. Bullard said the insurance industry was “apoplectic because if they sell a variable annuity and they are subject to fiduciary duty, that means they will probably have to fully disclose the compensation they are getting.”

• InvestmentNews
  • How do you put a dollar sign on fiduciary duty? (1/16/2012)
  • Broker fiduciary rule officially in limbo (1/13/2012)
  • Kevin Keller: A fiduciary standard is good, old-fashioned common sense (10/9/2011)
  • The top 10 regulatory moves advisers need to know (10/5/2011)
  • Frank — the industry's unlikely new ally (10/2/2011)
  • Don't expect fiduciary proposal this year: SEC insider (9/19/2011)
  • FIDUCIARY DUTY: Fiduciary duty, potential adviser SRO get their day in the sun (9/7/2011)
  • Fiduciary foes: Don't count your chickens (9/4/2011)
  • SIFMA gives SEC ideas for a new fiduciary standard (7/14/2011)
  • Land of the fee: Advisers seen switching revenue model ahead of fiduciary rewrite (7/13/2011)
  • Fiduciary duty skepticism crosses the aisle (5/18/2011)
  • Fiduciary advocates make push for new rules (5/15/2011)
  • Handful of broker-dealers holding back fiduciary rule (5/10/2011)
  • Will new pressures on Dodd-Frank influence the fiduciary standard? (5/9/2011)
  • The B-S solution to the fiduciary issue (5/11/2011)
  • Fiduciary standard could choke mutual fund distribution (4/3/2011)
  • SEC official: Fiduciary rule to be delayed SEC official: Fiduciary rule to be delayed (4/3/2011)
  • Fiduciary standard could choke sales of mutual funds (3/30/2011)
  • Planners push back against push-back of universal standard date (3/29/2011)
  • Fiduciary-duty rule pushed back (3/28/2011)
  • House GOP urges SEC to hold off on fiduciary rule (3/20/2011)
  • Fiduciary plan brings out fans, foes (3/13/2011)
  • SEC aims to curb broker, adviser comp that promotes excess risk taking (3/2/2011)
  • Fiduciary rule change would heap on costs, says SIFMA exec (3/1/2011)
  • High-wire act: The SEC's Mary Schapiro is treading carefully, trying to move a fiduciary standard forward (2/27/2011)
  • GOP zeroing in on fiduciary study (2/16/2011)
  • Wells Fargo's Carroll: Fiduciary standard will 'narrow' investment choices (2/9/2011)
  • Ketchum to firms: Single standard of care a done deal (2/8/2011)
  • SEC in no great rush to write fiduciary rule, Schapiro says (2/4/2011)
  • Fiduciary standard not happening until mid-2012: Ketchum (2/1/2011)
  • Report recommendations may upend wirehouse model (1/30/2011)
  • SEC must make its study work in the real world (1/30/2011)
  • The road to 'broviser' harmonization would mean more work for advisers (1/30/2011)
  • SEC fiduciary, SRO studies in congressional limbo (1/26/2011)
  • Battle lines drawn after SEC backs fiduciary standard (1/22/2011)
  • SEC should require fiduciary standard (1/16/2011)
  • Single fiduciary standard, advisor SRO now seen as likely (1/14/2011)
  • Fiduciary-duty bad news for less affluent clients: NAIFA (12/17/2010)
  • Why the SEC has it wrong on adviser signing bonuses By Mark Elzweig (11/21/2010)
  • SEC's pay rules may mimic TARP's (11/14/10)
  • 12(b)-1 reform fades into the background: Staggering under its Dodd-Frank load, SEC appears unlikely to act before mid-2011 (11/14/2010)
  • SIFMA changing its tune on fiduciary standard: Critics (11/11/10) - The Dodd-Frank measure gives safe harbor to the charging of commissions and the selling of proprietary products, and limits the timeframe that for a fiduciary duty to continue after the sale of an investment product.
  • Memo: SEC to issue new broker pay rules by April (11/10/10)
  • SEC plans to issue new rules on broker pay (11/8/2010) - SEC Chairman Mary Schapiro said some brokerage pay practices ‘absolutely have to change' ... taking aim at compensation practices across the brokerage industry — specifically the large upfront bonuses firms pay many brokers and advisers when they leave one firm and join another. . . Upfront bonuses and compensation that encourages risk-taking “are things that absolutely have to change,” she said. Ms. Schapiro said that the SEC intends to write rules that require “compensation programs that incentivize the right kinds of behavior.” . . . She also criticized pay schemes that produce “higher levels of compensation for higher levels of turnover in the portfolio,” As firms scrambled to pick up brokers in 2009 after seismic shifts on Wall Street, some broker-dealers began offering top advisers pay packages that could be greater than 300% of one year's fees and commissions. Much of the bonus is linked to the broker's performance after joining the new firm. That caught Ms. Schapiro's attention, and in August 2009 she issued an “open letter” to broker-dealer chief executives. “Certain forms of potential compensation may carry with them enhanced risks to customers,” she wrote. “Some types of enhanced compensation practices may lead registered representatives to believe that they must sell securities at a sufficiently high level to justify special arrangements that they have been given. Those pressures may in turn create incentives to engage in conduct that may violate obligations to investors.”
  • GOP may tighten regulators' leash (11/7/2010) - SEC's Schapiro says new Congress won't slow reform (11/9/10)
  • Torrent of comments on fiduciary provision (9/25/10) - The SEC received more than 2,500 responses on the topic during the official 30-day comment period.
  • News Analysis: Schapiro's warning is likely to change broker recruitment (9/13/9) - Brokers are assumed to have an incentive to churn before they leave a firm, in order to boost trailing-12-month production. While no broker will admit that money was their primary motivator in changing firms, there's little doubt that upfront cash plays a big part in generating movement.
• InvestmentAdvisor, AdvisorOne, WealthManagerWeb
  • Fiduciary Standard Loses 3 Battles, but War’s Not Over Yet (9/20/2011)
  • Dodd-Frank and Fiduciary: Why I’m Depressed; What to Do By Harold Evensky (7/21/2011)
  • J.D. Power: Investors Clueless on Suitability vs. Fiduciary Standards (6/16/2011)
  • Does the Fiduciary Standard Cost Too Much? Not So Fast (6/7/2011)
  • Barney Frank to SEC: Don't Impose '40 Act Fiduciary Standard on Brokers (6/6/2011)
  • Blaine Aikin, fi360: The Extended 2011 IA 25 Profile (5/25/2011)
  • FINRA's Ketchum: Disclosure a 'Key Ingredient' to Fiduciary Duty, but Not Sufficient Alone (5/24/2011)
  • FINRA Annual: LPL's Casady, BofA's Krawcheck Urge Caution on Single Fiduciary Standard (5/23/2011)
  • CFA to Congress: Cost-Benefit Analysis Will Hamstring SEC's Fiduciary Rulemaking Process (5/11/2011)
  • The Cost of Protecting the Public: The SEC, Congress and the Fiduciary Standard (5/10/2011)
  • SEC's Schapiro: Agency Will Turn to Fiduciary, Harmonization, 12b-1 After July 21 (5/6/2011)
  • The Missing Link: a Fiduciary Standard and Harmonizing BD Regs (4/26/2011)
  • The Secret Battle to Save Arbitration (4/12/2011)
  • The Problem Isn't With RIAs: Why a Fiduciary Standard for Brokers Makes Sense (3/29/2011)
  • House GOP to SEC: Regulator Lacks 'Solid Basis' for Fiduciary Rulemaking (3/18/2011)
  • SEC's Blass at IAA: Fiduciary Standard Will Only Be Toughened: SEC fiduciary rulemaking proposal likely out April-July timeframe (3/11/2011)
  • SEC Is Woefully Understaffed to Fulfill Dodd-Frank, Review Reportedly Finds (3/7/2011)
  • FPA Backs Fiduciary Standard, Reaches Out to FSI Members (3/2/2011)
  • The Political Realities of Broker Reregulation and the Fiduciary Standard (2/22/2011)
  • Video: Fiduciary Duty, Separation of Sales and Advice, and RIA Oversight (2/18/2011)
  • SEC’s Fiduciary, SRO Studies Considered Linked, Experts Say (2/10/2011)
  • HighTower's Weissbluth: ‘Choice’ Argument Against Fiduciary ‘Intellectually Dishonest’ (2/7/2011)
  • SEC and the Fiduciary Study, Part III: Where Do We Go From Here? (1/26/2011), SEC and the Fiduciary Study, Part II: Politics and the Fiduciary Standard (1/23/2011), and SEC and the Fiduciary Study: The Process, Part I (1/21/2011)
  • My Reservations Over the SEC’s Fiduciary Standard Report (1/25/2011)
  • Reaction to SEC’s Fiduciary Study Is Entwined With Politics (1/24/2011)
  • SEC Tells Congress It Will Proceed With Uniform Fiduciary Standard for Brokers, Advisors Industry officials (1/22/2011)
  • SEC and the Fiduciary Study: The Process, Part I (1/22/2011) - "Sources put the financial services lobby at about $500 million a year during the run up to financial reform legislation."
  • Inside Information on SEC’s Likely Fiduciary Move (1/18/2011)
  • DOL to Hold Hearing March 1 on Fiduciary Proposal, Webcasts on Jan. 4 (12/28/2010) - The Securities and Exchange Commission (SEC) is due to deliver its report on fiduciary duty to Congress on Jan. 21.
  • Evensky Suggests: Read Vision of Dystopian, Non-Fiduciary Future (12/23/2010)
  • Outlook 2011, Regulation & Legislation: Advisors Brace for Dodd-Frank (12/21/2010)
  • After the Flood (11/18/2010)
  • At Fiduciary Forum, Academics, Practitioners Share Views on How SEC Should Proceed (9/24/2010)
  • Industry Lobbying of SEC on Fiduciary Standard to Continue (8/31/10)
  • As SEC Fiduciary Comment Deadline Arrives, Groups Polish Responses (8/30/2010)
  • Why Brokers Are Like Butchers (8/10/2010) - Elliot Weissbluth used an interesting analogy to suggests that brokers are like butchers, not dieticians regarding a client's financial diet.
  • What a ‘Harmonized’ Fiduciary Standard Should Look Like (7/22/2010)
  • Financial Reform Bill and the Fiduciary Standard for Brokers (7/15/2010)
  • Reaction to Financial Services Reform Bill Is Swift (6/27/2010)
  • Saratoga--Not Yorktown (6/24/2010)
  • Nobel Laureates and others call for Fiduciary standard (3/15/2010)
  • B/D or RIA? The Case for the Registered Investment Advisor by Mike Patton (9/1/8)
• FinancialPlanning, Bank Investment Consultant
  • Survey: Fiduciary Duty Top Reason Investors Choose RIAs (10/17/2011)
  • Fiduciary for All (10/1/2011)
  • Financial Planning Coalition Lobbies SEC to Broaden Fiduciary Standard (6/23/2011)
  • Struggling With the Fiduciary Standard and Risk Tolerance (5/17/2011)
  • Democrats Blast Proposal to Redefine "Fiduciary" (5/13/2011)
  • Financial Planning Coalition Backs Fiduciary Standard (3/30/2011)
  • Fiduciary Standard for Brokers Not Likely Until After July (3/28/2011)
  • Are Big Changes Coming For Brokers, Advisors? (3/29/2011) - "Rather than advice being incidental to trade execution, trade execution will be incidental to advice."
  • Gold Into Straw: The SEC's recommendations to "harmonize" two regulatory structures reveal more than the agency intended (3/1/2011)
  • What Are the Implications of a Uniform Fiduciary Standard? (2/10/2011) - "I believe where this all went wrong was when you stock brokers and broker-dealers started to provide services that looked more and more like those of an RIA," Bradley said. "The problem is that most of that was done under rules that were supposed to govern brokers."
  • Advisors Wait For Next Regulatory Shoe To Drop (2/2/2011)
  • FINRA Chief: Fiduciary Standard Will Take Time, Finesse (1/31/2011)
  • How Does a Uniform Fiduciary Standard Help the Confused Investor? (1/27/2011)
  • What’s Next for the Fiduciary Standard? (1/24/2011)
  • SEC Recommends Uniform Fiduciary Standard (1/22/2011)
  • Beware the 300% Signing Bonus (12/14/2010)
  • Double Standards? By Bob Veres (12/9/2010) - In the medical world, we have the Hippocratic Oath AND board certification; the two, together, are designed to ensure that doctors will put our health above other considerations and that they have at least some idea what they're doing. In the financial services world, the debate is effectively focused on the Oath part of consumer protection without any minimum educational or proficiency requirement.
  • One Standard or Two? (12/2/2010) - We're hearing from lobbyists, the Financial Planning coalition, brokerage firms and the Financial Services Institute, and everybody seems to think that the question is "all or none'--everybody should be held to one standard, which is either fiduciary or suitability. But in the real world, there are two classes of independent advisors--those who give relatively impartial advice to their clients, and those whose primary objective is to rack up sales and GDC[gross dealer concession].
  • What’s Next for Upfront Packages? (12/1/2010)
  • Will the Republican Wave Rock the Fiduciary Debate? (11/7/2010)
  • Side Effects Could Hamper Fund Sales Charge Proposal (11/5/10)
  • Advisor Groups Spar Over Fiduciary Solution (8/31/2010) - Back in 2005, the SEC famously exempted Series 7 financial advisors from having to adhere to the 1940 Act’s fiduciary standards in what became known as the “Merrill Rule.” “The Commission should not allow certain firms to provide personalized investment advice to retail customers at a lower standard simply to accommodate those firms’ business models,” The FPC says in its letter. The whole issue of commissions puts the FPC in something of a quandary. On one hand, a investor who just wants to make a one-off purchase of a product and has no desire for follow up is often better off paying a commission rather than an ongoing fee. On the other, commission pricing on certain products can motivate an advisor to recommend a higher-paying product over another, something that’s fine under Finra rules so long as the product is suitable to the client’s time horizon and risk tolerance, but would not be an option a true fiduciary would offer.
  • Bank Advisors Split on Fiduciary Standard (8/26/2010)
  • Congress Kicks Fiduciary Debate to SEC for Study (6/25/2010) - the SEC is charged with studying differences in fiduciary and suitability standards over the next six months, and then potentially create rules that fill any gaps, although the language of the bill doesn’t make this mandatory. Currently, registered investment advisors are held to a fiduciary standard under the Investment Advisers Act of 1940, whereas investment advisors who hold securities licenses report to FINRA, which requires advisor recommendations to be “suitable” to a client’s needs. RIAs have long complained that the suitability standard is not good enough and that anyone selling investment products should do so only when it is in a client’s best interests.

• The Committee for the Fiduciary Standard suggests adoption of five core principles
  1. Put the client's best interest first.
  2. Act with prudence; that is, with the skill, care, diligence and good judgment of a professional.
  3. Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts;
  4. Avoid conflicts of interest.
  5. Fully disclose and fairly manage, in the client's favor, unavoidable conflicts.

Research and Studies

• SEC Study on Investment Advisers and Broker-Dealers January 2011
• Investor Knowledge and Experience with Investment Advisers and Broker-Dealers by Angela Hung (RAND), Noreen Clancy (RAND), and Jeff Dominitz (Carnegie Mellon University) (11/11/2010)
  • The financial services industry has been changing so fast and growing so complex that broker-dealers and investment advisers, which are subject to different regulations, are no longer easy to distinguish from one another.
  • Typical investors are confused about what services different financial professionals offer.
  • Many investors do not understand the key distinctions between advisors and brokers (titles, fees, services).
  • Many respondents did not understand the term fiduciary and whether fiduciary was a higher standard than suitability.
  • Even though they sought to explain fiduciary duty and suitability in plain language, respondents struggled to understand the differences between the standards of care. Even after explaining that a fiduciary duty is generally a higher standard of care, focus-group participants expressed doubt that the standards are different in practice.
• Study on Fiduciary Standard Impact by SIFMA (11/1/2010)
• Almost All Investors Support a Fiduciary Standard (9/15/10) - survey of 2,012 investors polled in August by Infogroup/ORC - “Investors are basically clueless,” added Barbara Roper, director of investor protection for the Consumer Federation of America. “They do not understand the differences in services being provided. This lack of understanding is not because investors are stupid. It is because the policy itself is stupid.”
  • At 91%, the overwhelming majority of retail investors support a fiduciary standard for all financial advisors.
  • The survey indicates that there is some surprise among investors—seventy-six percent, to be exact—that their financial advisors aren’t, strictly speaking, acting in their best interests now as fiduciaries.
  • Some 97% of investors agree with the statement (and 85% strongly agrees) that “when you receive investment advice from a financial professional, the person providing the advice should put your interests ahead of theirs and should have to tell you upfront about any fees or commissions they earn and any conflicts of interest that potentially could influence that advice.”
  • 96% of investors say everyone selling investments, including insurance agents selling annuities, should be held to a fiduciary standard.
• Most investors think brokers are fiduciaries, survey says (9/15/10) - Opinion Research Corp./Infogroup
  • Among 1,319 investors it surveyed, 91% believe that a broker and investment adviser should follow the same investor protection rules, and 96% favor applying those uniform rules to insurance agents as well.
  • And at least 60% of the respondents said they assume that insurance agents and stockbrokers are already held to a fiduciary duty – which is not true. Currently, brokers only have to meet a suitability standard ensuring that investments meet a client's needs, risk appetite and timeline.
• Wall Street Despised in Poll Showing Most Want Regulation from Bloomberg (3/24/2010)
• The Fiduciary Principle: No Man Can Serve Two Masters in Journal of Portfolio Management (Fall 2009) from John Bogle (or 4/1/2009 presentation).
• Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry (5/21/2009) by Daniel Bergstresser, John M. R. Chalmers, and Peter Tufano - Many investors purchase mutual funds through intermediated channels, paying brokers or financial advisors for fund selection and advice. This article attempts to quantify the benefits that investors enjoy in exchange for the costs of these services. We study broker-sold and direct-sold funds from 1996 to 2004, and fail to find that brokers deliver substantial tangible benefits. Relative to direct-sold funds, broker-sold funds deliver lower risk-adjusted returns, even before subtracting distribution costs. These results hold across fund objectives, with the exception of foreign equity funds. Further, broker-sold funds exhibit no more skill at aggregate-level asset allocation than do funds sold through the direct channel. Our results are consistent with two hypotheses: that brokers deliver substantial intangible benefits that we do not observe and that there are material conflicts of interest between brokers and their clients.
• Investor and Industry Perspectives on Investment Advisers and Broker-Dealers from The RAND Corporation (Sponsored by the United States Securities and Exchange Commission) 2008 (228 pages)
  • "Even though we made attempts to explain fiduciary duty and suitability in plain language, focus-group participants struggled to understand the differences in standards of care. Furthermore, focus-group participants expressed doubt that the standards differ in practice."
  • "focus-group participants with investments acknowledged uncertainty about the fees they pay for their investments, and survey responses also indicate confusion about the fees."
• US SEC won't appeal fee-based accounts ruling (5/14/2007) - A survey released recently by the Consumer Federation of America stated that fewer than one-third of U.S. investors understand that broker's primary service is buying and selling securities, not investment advice.
• State of Washington Investor Bulletin - "It used to be easy to tell whether you were dealing with a broker-dealer or an investment adviser. In the past, an investment adviser charged a fee for advice. A broker-dealer charged a commission, markup, or markdown for each transaction it executed in a brokerage account. Things are no longer so simple. The financial services industry now offers many different options for paying for investment advisory and brokerage services. These options include bundles of investment advisory and brokerage services. With all the choices available, an investor needs to take a hard look at what investment advice or brokerage services he or she really wants or needs and how much he or she is willing to pay for it.
• A 2006 study by TDAmeritrade revealed that 74% of investors did not understand the different obligations required of RIAs and stockbrokers. Unlike stockbrokers, RIAs have an obligation to act in the investor's best interests in all aspects of the financial relationship. After learning about the differences between a brokerage account and an advisory account, 79% of investors said they would be less likely to go to a brokerage firm for financial advice.

The primary reason to create a fiduciary rule is not to head off major scandals, it’s to stop the daily nickel-and-diming that costs investors millions of dollars a year. Pending SEC action, investors should take advice only from a broker or planner willing to be a fiduciary.

Jane Bryant Quinn in Will the SEC Force Your Broker to Behave? from Moneywatch (1/26/2011)

At the beginning of the last century, Americans rightly demanded that those who provide their health care meet the highest educational standards. But a decade into the 21st century, American investors have yet to demand the same from those who give them advice about their money. Indeed, standards are hardly high. To sell financial products, a person has only to pass a two-hour exam that covers basic investment products and laws. There are no educational requirements to become a financial adviser—not even a college degree. . . It’s time to take the next series of steps to improve the intellectual standards of practitioners in our industry and transform the typical financial adviser from one with a sales product in mind to one with a particular investor’s portfolio in mind.

Lane Steinberger in Looking for Abraham Flexner: Today’s investors must demand higher standards from their financial advisers from CFA Magazine Nov-Dec 2010 (or here)

The depressing fact of the matter is that federal and state governments do not regulate brokers in the same way they do other professionals. For example, the law does not consider brokers to be fiduciaries, as are practitioners of other learned professionals. This arcane term refers to a professional's duty to put a client's interests first. Accountants, lawyers, bankers, and doctors all have fiduciary responsibility to clients and patients, as do investment advisors. Somehow the brokerage industry dodged this bullet.

William J. Bernstein in The Investor's Manifesto

Brokers have never enjoyed the purest of reputations in our popular imagination. From the corruptible Bud Fox of Wall Street to the manipulative bond salesmen of Liar's Poker, the people whose job it is to push investments out the door and into investors' arms have often been depicted as morally elastic. After all, brokers are ultimately salespeople who are generally compensated by commission and whose primary loyalty is to their employers . . . You wouldn't go to a doctor who earns a commission on every prescription he writes. Why treat your finances with any less respect.

Elizabeth Ody in Whose advice can you trust? from Kiplinger's (December 2010)

While we are on the subject of minimizing costs, we need to warn you to beware of stockbrokers. Brokers have one priority: to make a good income for themselves. That's why they do what they do the way they do it. The stockbroker's real job is not to make money for you but to make money from you. Of course, brokers tend to be nice, friendly, and personally enjoyable for one major reason: Being friendly enables them to get more business. So don't get confused. Your broker is your broker-period.

Burton Malkiel and Charles Ellis in The Elements of Investing

The sad thing is that there can be no legislation against stupidity.

Fred Schwed Jr. in Where Are The Customer’s Yachts?

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