It's unclear whether the Securities and Exchange Commission will advance a regulation to raise investment advice standards for brokers, but they should make the cultural shift and act only in the best interests of their clients now, the head of the
Financial Industry Regulatory Authority Inc. said Tuesday.
Richard G. Ketchum, chairman and chief executive of Finra, called on brokers to make the fiduciary standard their guideline and not to get bogged down in the legal liabilities associated with it.
“Worry less about the legal standpoint; worry more about it from a cultural standpoint,” Mr. Ketchum said during a panel at the Securities Industry and Financial Markets Association's annual conference in New York.
Mr. Ketchum is the latest industry executive to urge brokers to act in the best interests of their clients. In a speech last week, SIFMA CEO Judd Gregg called on brokers to put their clients first when giving them retail brokerage advice. And last night in the conference's opening speech, Chet Helck, SIFMA's chairman and chief executive of the Global Private Client Group at
Raymond James Financial Inc., sounded a similar theme.
UNIFORM STANDARD
The SEC is considering whether to propose a uniform fiduciary standard for retail investment advice, a move that would force brokers to provide the same standard of care as investment advisers. Advisers are fiduciaries, while brokers meet a less stringent suitability standard.
Mr. Ketchum is concerned about the risks to investors posed by the proliferation of structured products and leveraged exchange-traded funds. A
recent Finra study of conflicts of interest showed problems with the way brokerage firms sell them and the quality of disclosures.
Brokers who sell structured products should be able to explain in one paragraph why the fees and index risks related to them are in the best interests of a customer, Mr. Ketchum said.
“The industry would be less exposed and be better serving its investors if it did that each and every time,” Mr. Ketchum told reporters following his panel presentation.
While the fiduciary duty ball is in the SEC's court, Mr. Ketchum is trying to persuade Finra members to change their game plan when it comes to customer care.
“I don't make up rules when they don't exist,” he said. “Our rules relate to suitability and our rules relate to fraud, but I think that firms would have far better controls if they put those type of processes in place — and many have, in terms of building it into their culture.”
As the market moves into a period of increased volatility, brokers must brace their clients, Mr. Ketchum said.
“I would focus as an adviser on negative scenarios, on making sure customers understand those scenarios,” he said.
Finra is working on a proposed rule that would allow it to gather more data regularly from clearinghouses to monitor which products are being sold to clients and where problems are cropping up.
“Our vision is a regulator that has the ability to understand trends in the marketplace,” Mr. Ketchum said.
Finra also is constantly trying to improve its processes for identifying and punishing rogue brokers.
“No one bars as many people from the industry as Finra,” Mr. Ketchum said. “We fight a continuing battle to get them out of the industry before they harm more investors.”
