August 20, 2010
The Fiduciary standard is the result of a 2008 Rand Corp. study, which found that investors were confused about the nature of services offered by their financial professionals and they couldn't differentiate between investment advisors and broker-dealers. What proponents of the "harmonized fiduciary proposal" fail to acknowledge is that the study also found that the vast majority of respondants expressed satisfaction with their own financial professionals.
The premise behind the effort is based on the perception that the fiduciary duty governing investment advisors provides greater investor protection than the suitability standard governing broker-dealers.
I disagree that the fiduciary standard has protected consumers better. Basically,the fiduciary standard looks back and enforces breaches retroactively through SEC enforcement or private lawsuits. The suitability standard looks forward and tries to prevent harm to consumers through ongoing and frequent FINRA and broker-dealer audits and compliance processes.
The suitability standard governing broker-dealers and registered representatives is a robust and heavily enforced standard.
My personal business is subject to quarterly checks and reviews and annual inspections from my registered principal. In addition, my home office compliance personnel do a very thorough office inspection every 1 to 2 years. I have been forced to hire staff who's largest single task is to help me and my office maintain the level of compliance required by my broker-dealer. Existing compliance requirements take away a great deal of time, time which I could better serve my clients with their service needs.
I firmly believe that I am already acting in the "best interest" of my clients. After 25 years in the financial services industry, the bulk of my business comes from existing clients and the referrals that they provide. Furthermore, no studies have been conducted to support the idea that a fiduciary standard better protects the clients of investment advisors that the suitability standard.