The Problem Isn't With RIAs: Why a Fiduciary Standard for Brokers Makes Sense

Let me get this straight: Investment advisors currently have a fiduciary duty to their clients, which means they have a legal responsibility to put the interests of their clients first—ahead of their own interests, or the interests of any other party. And most people think that’s pretty cool, including the clients of RIAs, the Obama Administration, SEC Chairman Mary Schapiro—on her good days—and the clients of brokers, most of whom believe (mistakenly) that they already have the benefit of that same duty.  

So the SEC staff comes out with a report on Jan. 21 detailing the various studies that unequivocally show that most clients of brokers think their broker has a duty to act in their best interest, and reiterates that, in fact, under current law, brokers have no such duty (just in case anyone reading the study, such as the Republicans in the House of Representatives, suffer from the same ignorance as do most investors). The SEC staff report then goes on to reasonably recommend that the SEC remedy the investing public’s misperception that they have fiduciary protections when they don’t by granting them those protections.

Now, here’s the good part: Both the SEC and the House Republicans (who are reviewing the SEC’s report and its recommendations) coincidentally focus on how the regulation of RIAs can be increased to be more like the current regulation of brokers—exploring just how increased RIA regulation might be achieved and what the cost/benefit trade off of such regulations might look like. You just can’t make this stuff up.

Forgive me if I belabor the obvious, but on the off chance someone who doesn’t see the irony here might read this (say, someone in the SEC or Congress): THE PROBLEM ISN’T WITH RIAs. See, if the problem were with RIAs, we’d be trying to change the laws governing RIAs to be more like the laws governing brokers. But we’re not: we’re trying to require brokers’ behavior to be more like RIAs. Why? Because RIAs act in the best