August 28, 2010
I am writing to comment on the proposal to add a new legal fiduciary requirement for broker-dealers and their registered representatives. I would like to argue against imposing this new requirement. Ultimately the biggest problem is that this new standard will be vague, open to conflicting opinions, and would open me to financially crippling lawsuits.
I have been a registered representative for about two years with New York Life. I like to think this company already stands for doing what is best for the client. My business model for my own financial practice is based on developing multi-year relationships with individuals and families. Consequently, my self-interest in getting a commission is already secondary to doing what is right for the client. A selfish short-term product sale will hurt my ability to keep a long-term relationship with a client.
I do detailed fact finds on a client's overall financial situation and only then do I make product recommendations. Even though I am a "captive agent" with New York Life, I never try to force clients to buy New York Life products if I know of a better alternative. The reason is that I can only grow my business through current clients referring me to friends, family and associates. So my clients need to demonstrably see that I hold their financial interests as being more important than my personal stake in a commission. All this happens without the formal fiduciary requirement.
My big concern with the fiduciary requirement is with lawsuits. When if comes to financial investments, clients tend to hear what they want to hear. Even if you warn a client about market risk, they may combine a gambler's mentality with an inability to take responsibility for their own decisions. It's easy to foresee a situation where a client gets desperate in a down market and needs to recoup some lost cash. Suddenly I look like a cash cow to a lawyer who decides to sue me for "bad advice".
Your given lawyer will probably think this is a good gamble since my professional insurance carrier - like most insurance carriers - usually prefer to settle lawsuits rather than go to court. Unfortunately for me, the carrier will also drop my professional liability coverage before I ever get a chance to prove that I did not in fact violate a fiduciary standard.
The proposed fiduciary standard is dangerously vague. You can't really predict financial markets and the financial system is too complex for any one person to always be correct about what is best. "Best" is extremely subjective. And what is best for person A and not always best for person B. Any lawyer will find it easy to use hindsight to second guess whether I made a past decision in the best interest of a client who suffered any degree of financial loss. Even money making advice for a client won't protect me from lawsuits. As I understand it, the fiduciary standard could cause a bitter client to sue me, not because of a loss, but because they became aware of another investment strategy that performed better than the one I recommended.
The bottom line for me is that the fiduciary standard will make illegitimate lawsuits very easy to initiate. Frankly, given the subjectivity surrounding what is "best" advice, I fear for my ability to defend myself against any lawsuit. After we already know how investments performed, it is extremely hard to prove to a jury that a financial advisor's "bad call" really was made at the time in the best interest of a client.
It makes much more sense to use the current "suitability" standard where registered representatives try to only sell investment products to people who can afford to take a loss. This allows for numeric benchmarks of product appropriateness and quantifiable standards for allowing sales to happen. If the government wants to be involved with protecting consumers from financial loss, I think it makes more sense to focus on suitability rules.
If the fiduciary standard is applied, I think it likely that financial investing will get much more expensive for consumers. This will be due to the significantly higher cost of professional liability insurance for broker-dealers and registered reps. Without a doubt, this will be covered by higher commissions and fees charged to consumers.
Thank you for your time.
Christopher M. Theisen