For nearly 75 years, registered investment advisers have been subject to a fiduciary standard of care as specified in the Investment Advisers Act of 1940. The fiduciary standard means just what you'd expect it to mean: an RIA has to put its client's interests ahead of its own, is bound by the duties of loyalty and care that also apply to traditional trustees, and has to disclose conflicts of interest.
Stockbrokers and broker-dealers, on the other hand, have always been subject to the loosey-goosey standard of “suitability.” Suitability means, “I can rip you off 20 ways to Sunday as long as I disclose it in the fine print or you forget to ask me the right questions.” The suitability standard is a legacy from the long-ago days when brokers didn't give advice but only executed trades.
To make matters worse, a great many firms, especially larger ones, are dual-registered monsters. They register with the SEC so they can tell prospective clients they're fiduciaries, but they also register as brokers in case they later want to rip those clients off.
So why would anyone ever choose a broker over an RIA? Because otherwise how could a fool and his money be soon parted?
Naturally, I've personally been delighted with the distinction between RIAs-as-fiduciaries and brokers-as-rip-off artists(3) because I work for an RIA (Greycourt) and it gives us a huge competitive advantage.
But things started going off the rails with that magnificent piece of smug idiocy otherwise known as the Dodd-Frank Act. Section 913 of Dodd-Frank is a perfect example of good-intentions-gone-wrong because the well-intentioned fools who wrote and enacted the legislation were too busy feeling swell about themselves to think straight.
Section 913 required the SEC to study the question whether RIAs and brokers should be subject to the same standards. Naturally, you're thinking that this would require brokers to step up to the plate and take fiduciary responsibility for the recommendations they make. But note that it could also work the other way 'round: RIAs could have their fiduciary standard watered down to something the brokers could live with. (Note to Dodd-Frank enthusiasts: think before you enact.)
And damned if that isn't just what the SEC has in mind. The commission dutifully conducted the study Dodd-Frank required it to conduct, and the study dutifully discovered that “many investors are confused by the standards of care that apply to RIAs and [broker-dealers].”
But did the SEC simply extend the fiduciary standard of RIAs to brokers? No! What the SEC apparently intends to do is to create some diluted version of the current fiduciary standard (or, more likely, some modestly beefed-up version of the suitability standard) and to apply it to RIAs and brokers alike.
If the SEC exists for the sole purpose of protecting the investing public, why would it do such a thing? See my next post.
Greg Curtis is chairman of Greycourt & Co., Inc. He is the author of "The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors" (2012) and "Creative Capital" (2004). Greg's blog is available at www.GregoryDCurtis.com/Blog.