July 30, 2010
The standard governing broker-dealers are registered representatives is a robust and heavily enforced standard. Such a contrast it to how I see the fiduciary standard governing investment advisers is applied and enforced. The Dodd-Frank Act permits the SEC to require that all broker-dealers be held to the same legal fiduciary requirement investment advisers have when providing advice to clients. Should the SEC choose to use that authority, the fiduciary duty as defined by the Dodd-Frank Act would require that all broker-dealers be held to a legal and vaguely defined standard "to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice."
While NAIFA members believe they are already acting in the "best interest" of their clients, the Act does not define what the rules are for compliance with a legal "best interest" standard - thus subjecting registered representatives to the potential of never ending lawsuits. For example, is "best" the cheapest recommended product? The "best" premium relative to the benefit of the product? The product with the "best" historic underwriting and service standards? Is it the one from the carrier with the "best" rating? The fiduciary standard in essence adds a vague legal liability standard that looks back (sometimes after many years) and is enforced after the fact by the SEC or trial lawyers who have perfect vision in hindsight.