“Investors typically make no distinction between broker-dealers and investment advisors, and most are unaware of the different legal standards that apply to their advice and recommendations."
Consideration of a proposed uniform fiduciary standard for broker-dealers and investment advisors will have to wait another day. A meeting scheduled for Thurs. Oct. 10 by the U.S. Securities and Exchange Commission Investor Advisory Committee to consider a draft proposal has been postponed because of the government shutdown.
The casual retail investor may take it on faith that their financial advisor or financial services provider would be working in their best interests. Technically, though, this fiduciary standard only applies to financial advisors. Broker-dealers are not bound by federal law to a fiduciary duty, but are required to give “suitable” investment advice and to disclose any conflicts of interest to a client.
The draft proposal to be presented to the SEC Investor Advisory Committee acknowledges the “important role” broker-dealers and investment advisers play in helping Americans “organize their financial lives, accumulate and manage retirement savings, and invest toward other important long-term goals.”
Broker-dealers are regulated as salespeople under the Securities Exchange Act of 1934, while investment advisers are regulated as advisors under the Investment Advisors Act of 1940. But distinctions between the two have blurred over the past several decades, causing confusion among retail investors. Many contemporary broker-dealers offer advisory services, and many employ titles such as financial advisor for their registered representatives and market themselves as such. “Investors typically make no distinction between broker-dealers and investment advisors, and most are unaware of the different legal standards that apply to their advice and recommendations,” the proposal notes.
The Investor Advisory Committee is advocating that “personalized investment advice to retail customers should be governed by a fiduciary duty, regardless of whether that advice is provided by an investment advisor or a broker-dealer.”
Financial industry leaders promote the uniform standard as a way to both eliminate confusion over the multiple hats worn by brokers and increase investors’ trust in the financial service industry. Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority (FINRA), which regulates nearly 4,300 brokerage firms and about 630,000 registered securities representatives, advocates the uniform fiduciary standard, calling it “vital,’ in a speech he presented last March to the Consumer Federation of America. But the uniform fiduciary standard “is not a guarantee against misconduct,” he cautioned. “Compliance must be regularly and vigorously examined and enforced to ensure the protection of investors.”
Critics of the uniform fiduciary standard could ultimately make financial services too expensive for the average investor. In a response submitted to the SEC last July, Charles Schwab wrote, “Depending on how broadly the Commission would apply harmonized rules (whether to some or all RIAs), harmonized rules could cost the RIA industry well over $1,000,000,000.”
Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.
A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.