September 3, 2010
It is my experience that the average public investor does not know the difference between a stockbroker and an investment adviser and in fact, most believe that they are the same thing (particularly since most brokers refer to themselves as "financial advisors"). Likewise, they have no understanding of the different standards of care and duties owed to them depending on which professional they deal with.
It is also my experience that public investors already believe that a broker, like a lawyer, accountant or doctor, is required to act in the client's best interests as a fiduciary (although they may not use the word "fiduciary" to explain their expectations). I think part of this confusion is due to the brokers' use of titles such as "financial advisor" and "investment counsel, etc.
It seems self-evident to me that if investment advice is being rendered by a federally (SEC) regulated financial professional, no matter what they call themselves or who they are inspected by, it is in the public interest to have a uniform standard of care. As it stands today, there is constant litigation over the different standards and when and under what circumstances they apply.
Consider the complications that would result if the standard of care in the medical profession depended on the type of doctor consulted, or in the legal profession on the type of lawyer, or in the accounting profession on the type of accountant. That's essentially where we are today in the financial services industry.
In my view there should be one uniform standard of care for rendering investment advice on securities.
That said, for broker-dealers that do not provide investment advice (even incidentally), I think it would make sense to have a separate standard. Specifically, there could be a single "fiduciary" standard for firms that render investment advice and a different "negligence" standard for firms rendering execution or other non-advisory services. For example, a firm that limits its business to online execution of self directed trades would not be held to a fiduciary standard. It might be wise to call that type of broker-dealer by a different name to eliminate the possibility of confusion, but it certainly makes sense to regulate them at a different level.
That would require no change in which regulatory authority inspects their activities the SEC and state governments can inspect registered investment advisers, FINRA and the exchanges can oversee broker-dealers and the state insurance authorities can oversee insurance products.
Thank you for your consideration. I know this is a difficult and complicated issue with many ramifications and I appreciate your efforts.
Feel free to call me at (301) 963-3300 if you would like to discuss my comments.