August 5, 2010
I believe it is unrealistic to require all participants who provide financial services to individual retail clients (e.g. brokers, registered reps, insurance agents) to abide by a fiduciary duty to those end clients. Such a requirement would likely end up diluting the definition of fiduciary duty as it applies today, and would most certainly result in unintended consequences as an established and well-moneyed industry conjures a creative response to new regulation.
Instead, a "bright line" definition for consumers on whether their advisor/rep is acting in a fiduciary capacity is required. As it stands today, many of these financial service reps may sometimes 'act' in a fiduciary capacity and other times simply use suitability guidelines. Cross-selling is a common tactic, but is a part-time fiduciary supposed to exist in the business of giving investment advice?
I have talked to advisors/reps that charge an investment management fee and contract to advise on a fee basis (under a RIA), then also broker their own deals to the RIA -- effectively paying themselves twice for the same service/deal. The client is completely unaware of this dual compensation because it is buried in the bid/ask spread. I view this as highly unethical and probably fraudulent -- but thanks to the repeal of the Merril Lynch Rule, they simply create a RIA and have an attorney write up a disclosure full of incomprehensible legalese in their Form ADV (incidentally, advisors registered with the SEC are not required to list Broker/Dealer affiliates on Form ADV).
I suggest three steps: (1) That SEC standardize the titles/terminology/roles to make very clear whether an advisor or rep is working as a fiduciary for an end client. For example, a "financial planner" would abide by a fiduciary duty to the end client at all times, but a "financial counselor" need not honor such a duty. (2) That SEC require clear enumeration of sources of compensation that an advisor/rep may receive along with a list of all affiliations and registrations. (3) That SEC rigorously enforce such standards to protect consumers. Simply put, typical retail clients are poorly informed on these matters, and do not read the fine print (disclosures) heaped upon them. Only strong enforcement will dissuade unethical individual and institutional practices.