In 2010, the Dodd-Frank Act gave the Securities and Exchange Commission the power to enforce the fiduciary standard on all investment advisors, including those acting as brokers/salesmen. And since then the brokerage industry has worked tirelessly to keep that from happening.
The fiduciary standard is a legal obligation to put the best interest of the client first. The industry says that forcing a fiduciary standard will just result in higher costs and limited choices for investors.
Fiduciary advocates believe otherwise. And a recent study from Texas Tech, “The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice”, agrees with them. The study examined broker-dealer common-law standards in individual states to determine if imposing stricter standards has an impact on the ability to serve clients.
Common-law, or case law, is developed over time by the courts rather than being passed by Congress. And common-law fiduciary standards vary by state. The study divided states into three categories: strict fiduciary, limited fiduciary, and no fiduciary standard. That variance created room for a study of how different standards affect the advice investors receive…and the cost of that advice.
The study found “no statistical differences” in “the ability to provide a broad range of products…the ability to provide tailored service; and the cost of compliance”. In other words, forcing brokers to act in the best interest of their clients wouldn’t amount to providing lesser quality, or more costly, service.
It may, however, amount to brokers having to accept lower compensation. As it stands today, brokers are able to exploit a lack of standard and push highly-commissioned products that line their pockets more than they benefit the investor. Holding them up to an ethical standard would mean looking out for the client before looking out for the commission.
“Fiduciary principles embody the high ideals attendant to professional advice”, according to fiduciary advocate Blaine Aikin. The fiduciary standard is not more expensive for investors…but it is more valuable. It is a legal obligation to look out for the client first, and it is the highest standard of investor protection. It’s hard to put a price tag on that.
Still, that’s exactly what broker-dealers want to do. The brokerage industry would have us believe that forcing them to act as fiduciaries would cost investors more. They would have us believe that forcing them to act as fiduciaries would limit their ability to serve their clients. They would have us believe that it makes sense to compromise the standard of care in the name of imaginary cost cutting.
In other words, the brokerage industry would have us believe that serving their clients isn’t worth the price.
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