Wanted now: clear, consistent fiduciary standards for investment advice
Wednesday, January 26, 2011; 6:49 PM
When the Government Accountability Office and the Securities and Exchange Commission issued reports on the professionals who help investors make financial choices, I couldn't help but think of the battle cry of the civil rights movement.
But when it comes to overseeing financial advisers and broker-dealers, of course, that rallying cry turns to a wail of frustration. The Washington way is to study the problem to death, release reports and make recommendations that then have to be studied all over again. How long? Too long.
The GAO concluded that investors "may be unclear about standards of care that apply to financial professionals, particularly when the same individual or firm offers multiple services that have differing standards." And although there is no need for additional layers of regulation, the GAO said, a "more robust enforcement of existing laws could strengthen oversight efforts."
The GAO's recommendation? More assessments. The government should find out the extent to which investors understand the titles and designations used by financial planners. Additionally, the National Association of Insurance Commissioners, in concert with state insurance regulators, should assess consumers' understanding of the standards of care with regard to the sale of insurance products such as annuities.
The SEC's 208-page staff report concludes that investors are confused about the difference between the regulatory responsibilities of investment advisers and broker-dealers, who are subject to different standards when providing advice about securities. An investment adviser has a fiduciary duty to serve the best interests of clients. A broker-dealer is a firm or individual licensed to sell individual securities. Brokers don't have to act in a client's best interest. Instead, the law says they have to make sure their recommendations are suitable for the client.
Of course, this distinction is perfectly clear to you, right?
At least the SEC staff gets it. So what did it recommend? A uniform fiduciary standard of conduct for broker-dealers and investment advisers.
"Retail customers should not have to parse through legal distinctions to determine whether the advice they receive was provided in accordance with their expectations," the SEC staff wrote. "Instead, retail customers should be protected uniformly when receiving personalized investment advice or recommendations about securities regardless of whether they choose to work with an investment adviser or a broker-dealer."
I thought, "Yeah, here's a change that could make things easier for investors."
But let's not forget the Washington way. At the same time that the SEC staff issued its report, two Republican-appointed commissioners - Kathleen L. Casey and Troy A. Paredes - pooh-poohed the idea of uniformity.