Fiduciary Standard Does Not Increase Costs, Study Says

States that do not impose a fiduciary standard on broker-dealers are Arizona, Arkansas, Colorado, Hawaii, Massachusetts, Minnesota, Mississippi, Montana, New York, North Carolina, North Dakota, Oregon, Washington and Wisconsin.

The remaining states impose either a limited fiduciary standard, or the courts have interpreted state law to impose duties that appear to be fiduciary in nature. In the study, Finke and Langdon refer to these states as “quasi-fiduciary states.”

The Financial Services Institute and other industry advocacy organizations have long argued that the imposition of a fiduciary standard and the attendant higher costs would limit the ability of middle- and lower-income Americans to receive “affordable, quality financial advice” at a time when demand for such advice is rapidly growing. But the authors, referring to a “saturation rate” (or the ratio of the number of registered representatives to households in each individual state) find that “empirical results provide no evidence that the broker-dealer industry is affected significantly by the imposition of a stricter legal fiduciary standard on the conduct of registered representatives.”

Finke and Langdon acknowledge the opposition of the industry “to the application of stricter regulation suggests that agency costs that exist when brokers are regulated according to suitability are significant.”

But, they add, “imposition of a universal fiduciary standard among financial advisors may result in a net welfare gain to society, and in particular to consumers who are ill equipped to reduce agency costs on their own by more closely monitoring an adviser with superior information, although this will likely occur at the expense of the broker-dealer industry.”

The conclusion?

The industry is likely to operate in much the same way after the imposition of a fiduciary standard as it did before the widespread adoption of such a standard.