Subject: File No. 4-606
From: Michael Finke, Ph.D.
Affiliation: Associate Professor of Financial Planning

August 18, 2010

In any market for expert advice there is an imbalance of information between buyer and seller. This is the motivation to hire an expert in the first place. When this imbalance exists, the buyer is vulnerable to self-serving advice since they are not able to detect the quality of advice even after purchase. For this reason, it is economically efficient to require a legal fiduciary standard that provides an incentive for the adviser to look out for the best interests of the client. Most expert advice professions employ a fiduciary standard of conduct between buyer and seller for this reason. Like medicine or law, the profession of financial advice needs a fiduciary standard.

Most customers are unaware of the dual regulation of financial advice professionals in the U.S. This provides an a lucrative opportunity for those who are subject to non-fiduciary regulation. They can make recommendations that meet a threshold of suitability (often a low threshold), while using the imbalance of information to make recommendations that primarily benefit the adviser. Removal of the suitability standard and imposition of a fiduciary standard will reduce their ability to extract excess rents from vulnerable consumers. This is obviously what motivates opposition of the imposition of a broad fiduciary standard for those selling financial products to consumers. It should be expected, but it is not in the best interests of consumers or of society in general.

It should also be noted that many do not pay for financial advice due to uneven quality and the inability to detect quality prior to purchase. Imposition of a fiduciary standard (and the use of minimum quality standards to license or certify financial advisers) could potentially broaden the market for financial advice as it has for many other professions subject to similar standards. This consumer confidence in financial advice services has never been more important in an era where individuals are increasingly responsible for their retirement and making sound choices in an increasing complex financial marketplace.