This publication always has thought that what is best for the investor is, in the long run, best for the industry.
How then should we react to the ruling by the U.S. Court of Appeals for the District of Columbia Circuit which overturned the Securities and Exchange Commission’s broker-dealer exemption rule?
That exemption allowed registered representatives to call themselves investment advisers without being required to act as fiduciaries as long as any advice they dispensed was “incidental” to a transaction, even if they charged a fee instead of receiving a commission.
Muddied the waters?
Financial planners thought that the exemption wasn’t in the best interests of investors, while the brokerage community thought that it was.
Both have good arguments.
The planning community, as exemplified by the Denver-based Financial Planning Association, thought that this exemption muddied the waters among planners, investment advisers and brokers, and potentially sowed confusion in the minds of investors.
It argued that under the exemption, investors might think that the investment guidance they received from brokers always was objective and solely in their interests, and unbiased by the interests of the brokers when, in fact, brokers merely had to recommend investments that were appropriate.
If clients thought that they could get unbiased investment advice “free” from a broker, why would they pay a fee to a planner or a registered investment adviser?
Planners are required to be fiduciaries, to act solely in the best interests of the clients. There shouldn’t be different rules for different groups when they are offering a similar service — that is, advice.
The FPA argued that anyone who provides investment advice should be held to the same behavioral standards: They should be required to accept fiduciary responsibility and the liabilities that go with it.
Representatives of the brokerage industry, on the other hand, argued that many investors are unwilling to pay for advice, and that brokers, if they wish to keep their clients, will offer the best advice they can.
They won’t steer clients into investments that are likely to perform poorly, just to make an additional buck in the short run, because it may cost them much more in the long run.
Further, if brokers can’t provide advice incidental to the purchase or sale of securities or mutual funds — for example, by warning the client that a particular investment carries more risk than may be suitable for someone in their situation — investors are likely to make many more investment errors.
Finally, it is very difficult to avoid giving at least incidental advice.
Many clients who call their brokers to buy or sell will ask the broker, “What do you think?”
Should the broker be required to shrug and say, “That’s not my problem”?
The court has thrown a hot potato back into the SEC’s lap. It will have to find a solution that serves the best long-term interests of investors.
We think that confusion over the roles and responsibilities of brokers runs counter to investors’ best interests.
Brokerage firms that wish to call their brokers investment advisers should register as investment advisers and accept the attendant fiduciary responsibility.
Those that don’t want to accept the fiduciary responsibility should no longer be allowed to call their brokers investment advisers or financial advisers. That way, the clients will have no confusion over the role of the broker, which is to facilitate a purchase or a sale of an investment.
Clarification of roles and responsibilities of all in the investment services industry is, in the long-run, in the best interests of the investor and the industry.
