Now that we have heard from both the House and Senate committees on finance and banking about the importance of protecting investors from practices on Wall Street which often confuse or could even be misleading investors about the nature of the relationship that they have with their broker or advisor, let’s not misinterpret what they are saying.
For most investors, the nature of their relationship with their investment advisor is pretty clear: the advisor is bound by a duty of fiduciary loyalty and required by law to put the clients’ interests first. Period.
What’s also clear is the metamorphosis of the sales relationship between brokers and customers to one of a trusted advisor-client relationship, without the important framework of fiduciary principles and regulatory and legal structures to back that up. That hampers efforts by B/Ds and their registered representatives who wish to build long-term, trusted relationships with their clients, and one way or another it looks like this may be about to change. These relationships are important and there is room for a broker-sales relationships with customers as well as (separately) fiduciary-advisory relationship with clients.
The nature of the relationship needs to be clear from the start, and that includes appropriate titles, consistency of the relationship–no changing back and forth–robust and understandable disclosure of conflicts, and a real understanding on both sides. In a fiduciary relationship, there’s the additional duty to put investor’s interests first at all times, to act with prudence, to avoid conflicts and if they are unavoidable to manage conflicts in favor of the investor, and to disclose all material facts.
It is interesting to note the differences in the House and Senate’s proposals for the Investor Protection Act (IPA) regarding fiduciary duty for those who provide advice to individual investors. The House Financial Services Committee, chaired by Rep. Barney Frank, (D-Massachusetts) voted for a version of the IPA that says: “a broker or dealer that is providing investment advice to a retail customer (and such other customers as the Commission may by rule provide), the standard of conduct for such broker or dealer with respect to such customer shall be the same as the standard of conduct applicable to an investment adviser under the Investment Advisers Act of 1940. The receipt of compensation based on commission shall not, in and of itself, be considered a violation of such standard applied to a broker or dealer.”
Senate Committee on Banking, Housing, and Urban Affairs, chaired by Sen. Christopher Dodd (D-Connecticut) introduced its discussion draft of the IPA on Nov. 10 (Highlights, full draft). The Senate version takes a different tack, adding a requirement that broker/dealer representatives who provide advice to individuals must be registered investment advisors. The approach is different but the upshot to the individual investor is a higher standard of care from either version of the IPA, with a framework of law in place to help ensure that the fiduciary standard of loyalty applies.