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April 20, 2018 at 11:14 AM
The Securities and Exchange Commission just threw brokers a lifeline. They should grab it.
Brokers’ troubles began in April 2015, when the Department of Labor first proposed its so-called fiduciary rule. The rule, which was issued a year later, requires brokers to act as, well, fiduciaries — or to put their clients’ interests ahead of their own — when handling retirement accounts.
It was a big departure from business as usual. Fund companies and other purveyors of financial products typically pay brokers to sell their wares, which means brokers are incentivized to recommend those that pay them the most, not necessarily those that are in their clients’ best interests. The naked conflict doesn’t exactly promote trust, so brokers aren’t quick to disclose it to clients.
All of that would obviously have to change under the fiduciary rule, and brokers fought back. They insisted they’re merely salespeople, dutifully executing orders for clients. And because they don’t give financial advice, there’s nothing wrong with selling the products that hand them the biggest bounty.
Last month, a federal appeals court in New Orleans seemed to agree. The Fifth Circuit Court of Appeals struck down the fiduciary rule in a 2-1 decision, finding the DOL exceeded its authority when it issued the rule. Writing for the majority, Judge Edith Jones pointed out investment advisers “are paid fees because they render advice,” whereas brokers “are compensated only for completed sales.”
A DOL spokesman told Bloomberg Law a day after the decision that it will no longer enforce the fiduciary rule. Brokers were no doubt overjoyed, but it was a classic case of winning the battle and losing the war.
Brokers now faced an existential problem, not just a regulatory one. Traditional brokerage firms charge a fortune for those “completed sales,” either in the form of high commissions or hidden sales charges that fund companies pay brokers and pass on to investors. Investors can buy comparable, if not identical, financial products from online brokers at a fraction of the cost, in some cases without paying any commissions at all. If brokers merely execute trades, then it’s not clear why investors should keep paying their premium prices.
