While attending the last in a series of events to celebrate what the Institute for the Fiduciary Standard christened as Fiduciary September, one comment stood out: The No. 1 compliant in Financial Industry Regulatory Authority (FINRA) arbitration cases is breach of fiduciary duty.
I’ve been covering quite extensively the Securities and Exchange Commission’s (SEC) efforts to write a rule to put brokers under a fiduciary mandate since the Dodd-Frank Act gave the agency the go-ahead to do so. The debate over how the agency should write such a rule—and whether one should be written at all—has been relentless during this two-year process.
The comment about fiduciary failures being the biggest complaint in FINRA arbitration cases was made by Marcus Stanley, policy director for Americans for Financial Reform. He argued that fiduciary advice for retail clients is particularly “pressing” due to the rise of complex structured products and because of the large volume of fiduciary breach complaints to FINRA.
A FINRA spokesperson confirmed to me the same day of Stanley’s assertion that fiduciary duty is indeed the biggest complaint in arbitration cases.
This fact highlights one of the biggest problems that arises in the debate over whether brokers should be held to the same fiduciary standard when giving retail investment advice as advisors under the Investment Advisers Act of 1940: The undying confusion among investors about if, and when, a broker is a fiduciary. Also at issue, and perhaps more importantly, is their inability to understand what acting as a fiduciary actually means.
As Tom Giachetti, chair of the Securities Practice Group at Stark & Stark, told me, the “discussion (noise) about fiduciary standards for brokers” must stop because “the public, those for whom the ‘noisemakers’ seek to benefit, will never understand it.” Advisors, he declared, must “stop trying to hold brokers to such a [fiduciary] standard. Unless the advisory community is prepared to take on clients who have $10,000 of investable assets, brokers are their source for investment advice. Non-fiduciary services [and] commission compensation does not equate to dishonesty, but it does require the seller to maintain supervisory procedures to make sure that the recommendation was appropriate for the investor.”
Indeed, after I wrote the original article for AdvisorOne.com on the FINRA fiduciary arbitration stats (See “Breach of Fiduciary Duty No. 1 Complaint in FINRA Arbitration Cases”), one reader commented that brokers’ ability to “pick and choose” when they are operating under a fiduciary standard or a suitability standard has only added to investor “confusion and increases arbitration.”
Brokers, the reader said, “do not want to adopt a fiduciary standard because operating under a ‘suitability’ standard is more profitable. So be it. Let them keep their profits. Don’t change the standards.” Changing the standards, the reader argued, “will only cloud matters further for uninformed investors. The solution is simple: Require brokers to issue a statement with ALL transactions and services that they do not operate within fiduciary standards.”