Why Shouldn't Investors' Best Interests Come First?

These are the questions that really matter for investors who receive investment advice from a financial services professional. After all, according to the SEC's 2008 Rand Report, this is what retail investors typically believe to be true--that they are dealing with a trusted advisor who puts the client's best interests ahead of their own. At issue is not simple caveat emptor. It is incorrect to think that this problem would be solved if only investors were savvier about investing, brokers and advice. The playing field between the financial services professional and the retail investor is truly not level--not by a long shot.

In fact, there are plenty of instances in which you could say the playing field is not level between some professional investors--such as some of those charged with investing local municipal or even county funds (remember Orange County California?)--and their financial intermediaries, as a look at Massachusetts Secretary of State William Galvin's Web site would show. But that's a column for a different day.

So what hope of a level playing field does the average retail investor have? First, investing is necessary for most Americans who want to retire--it is a relative few who enjoy a defined benefit pension plan anymore. And, it's not just stocks, bonds and cash anymore (in whatever format you choose--individual securities, mutual or hedge funds, ETFs). Now add to the mix structured securities, options, futures, commodities and more, and investing today becomes a place where advice that is in a retail investor's best interest is not a luxury, but a necessity. Add to that the reality that investment advisors and registered reps. both provide investment advice; but investment advisors are required, as fiduciaries, to put client's interests first; and registered reps. operate under a fiduciary duty to their firm, not their client, in most cases. Mix in the ubiquitous 'financial advisor' title for nearly everyone, or use of other consultant or counselor titles by those who are not required to put client's best interests ahead of their own--and can you blame retail investors for being confused? Of course not.

Now comes the economic crisis and out of that, financial services reform. The extension of the fiduciary standard to those who provide investment advice to retail investors has been clearly endorsed by the Treasury, White House, House of Representatives, Senate in its discussion draft legislation (yes, I know it's under revision), SEC Chairman Mary L. Schapiro, SEC Commissioner Luis Aguilar, Goldman Sachs Chairman and CEO Lloyd Blankfein and Commodities Futures Trading Commission Chairman Gary Gensler. This editor is a member of The Committee for the Fiduciary Standard.

One of the issues has been, as indicated by the Rand Report, investor confusion over the differences between brokers and investment advisors and their relationships and roles. The proposed fiduciary standard had not made it into mainstream media--for the most part--until very recently. Now that it has, though, big media has begun to make up for that deficit.

Bloomberg, The New York Times and The Wall Street Journal have, of late, reported on the fiduciary discussion that has heated up in recent days after Sen. Tim Johnson (D-South Dakota) circulated an amendment that could effectively kill the requirement that brokers and insurers who provide investment advice put their client's interests first.

Johnson proposes replacing the current Senate fiduciary requirement with a "Study and Rulemaking Regarding Obligations of Brokers, Dealers, and Investment Advisers." It's a study that sounds very much like what the SEC thoroughly covered in 2008 in, "Investor Perspectives on Investment Advisers and Broker-Dealers," performed for the SEC by the Rand Institute for Civil Justice.

Bloomberg reported on the Johnson amendment in, "Lobbying May Kill Fiduciary-Rules Plan for Brokers" on Feb 12. Tara Siegel Bernard wrote "Struggling for a Rule Over Brokers," in The New York Times on February 15. The New York Times continued its coverage in a special "Wealth and Personal Finance," section on February 18 with "Broker? Advisor? What's the Difference?" and "Homework for Hiring a Broker," and Ms. Bernard blogged about it in "Will You be my Fiduciary?"

Not to be outdone, The Wall Street Journal carried a Financial Advisor blog by Zach Anchors, "Voices: Knut Rostad on showing support for a fiduciary standard." Rostad is chairman of The Committee for the Fiduciary Standard.

Why should bank, broker or insurance company interests be put before investor's interests? This is a part of proposed financial services reforms that would not cost taxpayers any money, could help mitigate the growing risk of a retirement crisis, and would be materially meaningful to nearly every American who wants to save and invest to retire, put children through college, or for any other reason.

A number of Senators are reported to be working on different versions of the financial services reform package. The real question is: Are Senators strong enough--and do they have enough integrity--to stand up on behalf of retail investors and insist on extending the fiduciary standard to cover those who provide investment advice to retail investors? There's a real chance for someone to ride in on the white horse and be a hero or heroine here. Or will Congress, as so often happens, bow down to the bank, insurance and broker lobbyists and throw investors under the train?

Comments? Please send them to kmcbride@wealthmanagerweb.com. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

Read more Wealth Manager: Viewpoint blog posts:

Why Shouldn't Investors' Best Interests Come First? February 25, 2010 Are Senators strong enough--and do they have enough integrity--to stand up on behalf of retail investors and insist on extending the fiduciary standard to cover those who provide advice to retail investors?... Greater Good: The Unintended Consequences of Repaying TARP January 29, 2010 Did the requirement to repay TARP funds in order to pay bonuses for 2009 prompt some banks to repay the bailout funds too early? ... Smart Money January 19, 2010 Goldman Sachs Chairman and CEO Lloyd C. Blankfein testified that at Goldman Sachs, "...we do support the extension of a fiduciary standard to broker/dealer registered representatives who provide advice to retail investors." ... Ever Hopeful December 29, 2009 As we emerge from a challenging economic crisis, there is reason to hope that changes and opportunities we will see in this new year--some as a direct result of the economic crisis--will be positive.... Schapiro's Call for Fiduciary Standard Reflects SEC's Original Mandate December 07, 2009 "I believe that all securities professionals should be subject to the same fiduciary duty," says SEC Chair Mary L. Schapiro.... Mr. Dodd's Message from Washington November 16, 2009 Now that we have heard from both the House and Senate committees on finance and banking about investor protection, let's not misinterpret what they are saying. Can the DJIA at 10,000 Inspire "Animal Spirits?" October 16, 2009 The Dow Jones Industrial Average hit a year-to-date high and jumped above 10,000 on Oct. 14, and the next day hit another high of 10,062.94. Unless you are short, this is good news for you and for your clients. "Federal" versus "Authentic" Fiduciary Duty October 08, 2009 Both investment advisors and broker/dealer registered representatives routinely give financial and investment advice to clients. What is still different is the rules that protect those investors.... Are you Ready? September 22, 2009 Financial reform is around the corner. How will it affect you and your clients? The Capital is abuzz with discussions regarding re-regulation of financial services, something that the Administration wants to see passed by year-end.... "Trust Doesn't Come and Go" September 08, 2009 Once an advisor has that trusted relationship with a client, can the advisor "go back" to a non-fiduciary relationship?... Another Bernanke Term? August 26, 2009 President Obama nominated Fed Chairman Ben Bernanke for another four-year term on August 25, "because of his background, his temperament, his courage, and his creativity," in fighting the financial crisis that is now entering its third year. ... Can Derivatives be Tamed? August 14, 2009 Obama proposes reforms for OTC derivatives...Judge Jed Rakoff wants answers about Bank of America-Merrill bonuses...the Lewis Liman defense.... Avoiding Depression August 10, 2009 Depression Averted...says Paul Krugman...Should the Sec be self-funded? They make much more for the Treasury than they receive from Congress...... More
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