Taking much-needed steps to strengthen investor protections, the House Financial Services Committee has begun the first of several congressional hearings on reforming the securities industry. Initial discussions concern the Investor Protection Act of 2009, with the focus on hedge fund registrations, the creation of an agency to oversee the insurance industry and a law to protect consumer investors. As part of the proposed legislation, the Securities and Exchange Commission (SEC) would be allowed to make fiduciary duty the standard for any broker/dealer or investment adviser who dispenses investment advice about securities.
“Over the years, full-service brokers have been allowed to portray themselves to the public as ‘financial advisers’… all without having to act in their clients’ best interests, which is the true hallmark of an advisory relationship,” said Barbara Roper, director of investor protection for the Consumer Federation of America, in a July 25 article appearing in the Salt Lake Tribune.
Currently, brokers/dealers are held to a suitability standard. They are required to make recommendations deemed generally “suitable” for an investor. Investment advisers, on the other hand, are subject to an overarching fiduciary duty under the Investment Advisers Act of 1940. As fiduciaries, they have a duty to act in the best interests of their clients and to make full and fair disclosure to clients regarding conflicts of interest. Broker/dealers do not.
The distinctions, albeit subtle, mean broker/dealers are, among things, free to receive higher commission and fees for recommending certain investments or financial products to clients, despite the fact another product may be a better option. At the same time, many broker/dealers market themselves as “advisers,” creating further confusion for investors.
According to a 2008 study commissioned by the SEC and conducted by the RAND Corporation, the majority of investors do not understand the distinctions between investment advisers and broker/dealers – even when those distinctions are explained to them.
On Oct. 8, during a second House Financial Services Committee hearing, the following question was posed to lawmakers: Which is the higher standard, fiduciary or suitability?
The six witnesses, each of whom represented a broad spectrum of the financial services industry, replied: The fiduciary standard.
If the past year of the Bernie Madoff debacle, the crisis on Wall Street and repeated charges levied by the SEC on several broker/dealers and financial advisers for allegedly operating “mini-Madoff” Ponzi schemes and other investment scams has taught us anything, it’s that advisers, financial planners and broker/dealers who dispense investment advice must be held accountable for their words and actions. A first step toward making this happen is imposing a fiduciary duty standard for all financial professionals.
The bottom line: Allowing investment advisers and broker/dealers to operate under different statutory and regulatory frameworks not only creates confusion in an already complex industry but ultimately renders a disservice to investors. Adoption and enforcement of a strict, universal fiduciary standard of care to broker/dealers, as well as investment advisers is a step in the right direction to restoring investor confidence in the financial services industry.
Tell us about your investment losses. Leave a message in the area below or on the the Contact Us form. We want to counsel you on your legal options.