Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Industry Spotlight > Broker Dealers

The Sophistication Argument and Other Myths About Brokers, and Fiduciary

Your article was successfully shared with the contacts you provided.


Got some good comments on my last blog of March 29, raising many cogent points surrounding the current debate on extending a fiduciary standard to brokers. Rather than try to address them all, let’s address a few of the key themes that seem to run through them.

First, there’s the persistent myth that brokers are somehow “better educated” than RIAs. This one has Wall Street disinformation written all over it. Since brokerage firms are big on education, unless it’s about how to sell, this can only refer to the Series 7 exam, which as I understand it, is in large part about securities regulations and laws—which, again, one needs to know to sell legally. RIAs in most states, on the other hand, are required to actually have a professional designation: CFP, CFA, CPA, etc. Enough said.

The bigger implication here is about sophistication. That is, that brokers have more investment “savvy,” primarily due to their access to their firms’ research, economic forecasts and broader range of more esoteric financial products. In some cases, this is undoubtedly true. The problem is that if an advisor isn’t using his or her uber-sophistication on behalf of the clients, it’s a moot point. And as we all know, brokers are currently required by law to use their training, experience and sophistication on behalf of their firms, for which they are registered representatives. Which is why investors want advisors who must act in the investor’s best interest.

The simple fact is that the clients don’t understand to whom their brokers owe a duty. In 2004, the SEC contracted with SSG Consulting Group to study the issue. The report concluded: “[investors] did not understand that the roles and legal obligations of investment advisers and broker-dealers were different.” In 2008, the SEC/Rand Report came to a similar conclusion: “…the primary view of investors was that the financial professional—regardless of whether the person was an investment adviser or a broker-dealer—was acting in the investor’s best interest.” These and other studies led the SEC to conclude in its Jan. 21, 2011 report that “…retail customers do not understand and are confused by …the standards of care applicable to investment advisers and broker-dealers…” and that “Investors have a reasonable expectation that the advice that they are receiving is in their best interest.”

None of this investor confusion is an accident. With brokers legally allowed to call themselves “financial advisors” or “financial consultants,” or “wealth managers” or “financial planners” and virtually all of them using a title that’s not “broker,” it shouldn’t come as a surprise to anyone that investors are “confused” or that they erroneously believe brokers are required to act in their best interests.

I do agree, by the way, with those commentators who feel that brokers shouldn’t have a fiduciary duty to their clients: brokers shouldn’t be fiduciaries when they are acting as brokers. But then they should have to decide—Are they going to hold themselves out as brokers or as advisors?—and then stick to that choice, for all clients, all the time.


See all of Bob Clark’s blog postings at Clark at Large.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.