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February 28, 2010 at 07:00 PM
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.
