Whose investment advice can you trust?

Brokers have never enjoyed the purest of reputations in our popular imagination. From the corruptible Bud Fox of "Wall Street" to the manipulative bond salesmen of "Liar's Poker," the people whose job it is to push investments out the door have often been depicted as morally elastic. After all, brokers are ultimately salespeople who are generally compensated by commission and whose primary loyalty is to their employers. As a result, regulators have never required brokers to act as fiduciaries - that is, to act in the undiluted best interest of their customers.

Over time, brokers' roles have expanded to overlap those of a different group: registered investment advisers (RIAs), who are paid to provide investment advice and who, according to federal law, do have a fiduciary responsibility to act in their clients' undivided best interests. Indeed, a growing number of brokers earn their keep in the same way that many advisers do - by charging clients a percentage of the assets they manage. And many advisers still accept sales commissions.

A 2008 report published by the Rand Institute for Civil Justice said that most investors find brokers "indistinguishable" from RIAs. And a 2010 survey sponsored by several industry groups found that two-thirds of investors surveyed mistakenly believe that brokers are required to put their clients' interests first.

The Securities and Exchange Commission is studying the issue and will announce its conclusions in January. There's a good chance it will impose a fiduciary standard on brokers, requiring them to place their clients' interests ahead of their own.

Raising the bar

At first glance, the idea of a fiduciary duty sounds warm, fuzzy and unassailable. At its core are both the concept of trust - a client entrusts an adviser with his or her finances, just as you entrust your health to your doctor - and the notion that a fiduciary should make his interests secondary to those of his clients.

Brokers need only demonstrate that the investments they recommend are "suitable" for customers. Suggesting penny stocks for an 80-year-old widow would almost certainly flunk the suitability test.

To meet the suitability standard, brokers must make reasonable inquiries into the financial situation, tax status and investment objectives of their customers. But brokers are not required to subordinate their own interests - specifically, how much they're compensated.

Imposing the fiduciary standard sounds like a no-brainer, right? "I don't believe you can go wrong if you're putting the client's interests first," says Kevin Keller, president of the Certified Financial Planner Board of Standards.

The trouble is, it's difficult to pinpoint ways in which a fiduciary standard would improve the advice brokers provide. Some advocates say that if brokers were required to meet the fiduciary standard, they would have to recommend the best investments for clients, rather than merely suitable investments, because they would be required to take their clients' best interests to heart.

That is, at least in theory, the standard to which advisers are held.

But it doesn't seem to be an enforceable standard. "I have never seen any case law defining the difference between 'suitable' and 'best,' " says Nelson Ebaugh, a Houston-based securities lawyer. He says that if an investor sued his or her adviser, arguing that the adviser recommended a product that was suitable but not the best, "it would be considered frivolous."

Ironically, brokers are already subject to an elaborate oversight system, which aims to ensure that they follow the spirit and the letter of the suitability standard, in addition to the requirement that they "deal fairly" with clients. Broker-dealer firms enforce their own internal oversight systems. Typically, a firm is visited by the SEC or Finra, the brokerage industry's self-regulatory agency, once every two years. Individual states provide another layer of scrutiny. By comparison, registered investment advisers are regulated by either the SEC or their home state, but not both.