If you ask some broker-dealers, as well as insurance agents, a uniform fiduciary standard is not in consumers' best interests. Disclosing commissions and increased transparency of fee structures will result in higher costs for consumers as well as reduced choice. Consumer advocates disagree.
The Dodd-Frank Act, signed into law in July, empowered the Securities and Exchange Commission to study the issue of fiduciary duty for 6 months and apply the higher standard of care to broker-dealers and other financial service professionals employed in an advice-giving capacity. Broker-dealers are currently obligated to apply suitability standards to their clients.
The suitability standard mandates that brokers verify their clients' investing experience, investing goals and risk tolerance before recommending investments. The fiduciary standard is more stringent -- it instructs advisors to put the client's best interest ahead of their own and disclose conflicts of interest.
At the annual meeting of the Securities Industry and Financial Markets Association, or SIFMA, brokerage executives made a case against a universal fiduciary duty for all brokers and investment advisors, Reuters reported on Monday.
The Reuters story, "Brokerages say fiduciary rule may impact choice," quotes Chet Helck, chief operating officer at Raymond James Financial, as he expresses some confusion over how investment advisors adhere to a fiduciary standard when their client pursues strategies that are not in their own best interest.
"A very strict interpretation could not accommodate activities that a client wants," he said.
The other issue raised by brokers and SIFMA itself is the cost of service. A study commissioned by SIFMA found that investors pay 25 percent to 75 percent more for fee-based service compared to commissions.
On Investmentnews.com, the story "SIFMA: Flawed fiduciary duty could smack investors" details the SIFMA study.
Barbara Roper, director of investor protection at the Consumer Federation of America, criticized the study, arguing that no one wants to get rid of commission-based services. According to the Consumer Federation of America, the Frank-Dodd Act specifically states that commission-based payments do not violate the fiduciary standard.
The SEC has until January to decide whether or not broker-dealers should be subject to fiduciary standards.
In an interesting twist, in late October the Department of Labor proposed an amendment to the Employee Retirement Income Security Act, or ERISA, that would categorize broker-dealers as fiduciaries when they give advice to retirement plan participants and receive payment, Tradersmagazine.com reported on Tuesday.
The amendment would affect brokers advising clients about their IRAs and retirement plans that fall under ERISA, such as 401(k)s. More on that here.
All things being equal, would you rather talk to an investment advisor or broker who must disclose conflicts of interest or one who does not?