Brokers are only required to sell financial products to clients that are “suitable” to their investment needs. Registered Investment Advisors, however, are required to always put the client first, to act as a “fiduciary” on behalf of their clients. With financial reform in a bill over 2,000 pages long, Congress is commissioning yet another study (yes, these studies have been done before) in order to figure out the best way to move Brokerages over to the Fiduciary standard. My take on the controversy:
1. Perhaps we need a commission to study whether we need more studies or to figure out why studies done in 2005 (sponsored by TD Waterhouse, but done independently) and in 2008 (by the Rand Corp.) are insufficient and why we need more studies. Fact: The vast majority of clients do not understand the regulatory differences between Broker and RIA. Ah, don’t listen to me, or those other studies; let’s just do another study anyway.
2. The Fiduciary Standard does not automatically mean that RIAs are all saints. Google RIA fraud. You will find all kinds of forgery, bilking, thievery, and assorted skullduggery. And it’s in lots of states, of all sizes, with big firm custodians and small, and I’m not even mentioning Madoff. Whoops, I did mention Madoff. Fact: Regardless of the standard used to regulate those who give financial advice, the issue is one of individual integrity. Investors, especially in the age of regulatory reform with wonderful flourishes of words and pens, must not be duped into complacency. Bad Advisors will continue to do bad things and exist in all types of firms with every kind of model. Hasn’t it now been proven that regulation will never be a substitute for proper due diligence?
3. The vast majority of individual brokers strive to do right by their clients, believe that they are fiduciaries, and are not scared by the new regulation. Okay readers, think like a crook for a moment. Put yourself in the shoes of a Cheat Advisor, one of the truly bad guys, making a living by duping, stealing, fraud. What would scare you more? The possibility of the SEC audit showing up at your door infrequently (overworked bureaucrat who already failed to stop all of the frauds listed in your Google search that you did earlier) or the oppressive compliance departments at the Brokerage Firms, whose livelihoods depend upon their ability to protect their franchises, and who check your trades and your accounts every single day, in real time.
Conclusion: I’m not saying that there should not be one set of rules, but rules by themselves are never an answer. It’s illegal to rob my house, and the police will chase a thief after I call, and I live in a pretty safe suburban neighborhood. I still lock the door at night and set my alarm.
