Are Brokers Required to Act in the Clients’ Best Interest? - NOT

Wall Street finally has agreed to put its brokers under the tougher fiduciary standard for their dealings with customers. Now a fight looms over how tough that standard will be.

As part of its regulatory overhaul, the Obama administration proposed holding brokers who give investment advice to the higher fiduciary duty — a legal standard that would compel them to act in their clients’ best interests. Currently, brokers are held to a more lenient “suitability” standard, which means they can’t put clients in inappropriate investments. Many investment advisers, by contrast, have operated under the fiduciary standard for nearly 70 years.

Most investors do not understand the difference between a “broker” and an “investment advisor” lumping most persons who advise or manage investments as “financial advisers. What is the difference?

Most brokers and financial advisers are only required to meet the “suitability rule” that is they can sell you just about  anything as long as it can be classified as within the broad context of your overall goals. There is no requirement to act in a client’s best interest as to seeking the best investment, lowest and most reasonable cost nor is there any requirement to be objective and offer competitors products even though they may be better than the “in house” products the broker sells.

Registered Investment Advisers (RIAs), Investment Councillors and Portfolio Managers on the other hand are held to a higher standard of care, the fiduciary standard. By law they are required to “act in the clients best interest” all the time.

This means seeking, not just suitable, investments, lowest and most reasonable investment management costs and commissions and more but must act solely in the clients best interests.

This is why RIAs can only work for a fee and not commissions which is paid by the client. There can be no incentives to push a service or product and costs to the client must be transparent.

Read more at the WSJ here.

This entry was posted on 30. August 2009 at 17:22 and is filed under Investment Industry. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.