As experts debated Tuesday the current regulatory framework for advisors and whether brokers should be held to the same fiduciary standard as advisors, Marcus Stanley, policy director for Americans for Financial Reform, argued that fiduciary advice for retail clients is particularly “pressing.” He cited the rise of complex structured products and the fact that the top complaint in Financial Industry Regulatory Authority (FINRA) arbitration cases is breach of fiduciary duty.
Michelle Ong, spokeswoman for FINRA, confirmed to AdvisorOne on the day of Stanley’s assertion that fiduciary duty is indeed the biggest complaint in arbitration cases.
Stanley said the emergence of structured products plus the recent passage of the JOBS Act, which “allows increased solicitation of retail investors” to invest in such products as hedge funds and private equity, puts a fiduciary duty for brokers at the fore. “Study after study has shown that complex products don’t perform well,” Stanley told attendees at a joint forum held by the Institute for the Fiduciary Standard and Cato Institute on the regulation of advisors.
The Securities and Exchange Commission’s (SEC) staff study on putting brokers under a fiduciary standard as mandated under Section 913 of Dodd-Frank “contains extensive documentation” regarding investors’ inability to understand the difference between a broker and an advisor, Stanley said.
The principles-based fiduciary standard under the Investment Advisers Act of 1940 is “inherently flexible and it can be adopted by brokers,” Stanley said, “but we have to make sure that flexibility doesn’t mean watering down” such a standard.
Former SEC Chairman Harvey Pitt (left), who also sat on the panel, agreed that “many customers don’t understand the differences in a suitability [standard for brokers] versus fiduciary duty, and many lawyers don’t either.” But Pitt argued that a fiduciary standard can be “simple” and not result in a voluminous regulation like the Dodd-Frank Act.
Pitt told AdvisorOne in a separate interview that he believes brokers should be held to the same fiduciary standard as advisors, but “with carve-outs.” The real “issues,” he said, “are what services the professional is providing and what are the customers’ expectations.”