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Makin' Money

The "fiduciary" stakes are high

Chris Farrell Feb 1, 2011

Consumers won an important battle when the staff of the Securities & Exchange Commission recommended that brokers be held to a fiduciary standard, a much tougher code of conduct. Jane Bryant Quinn has a must read overview of the stakes. Now, fiduciary isn’t exactly a word many of us routinely (or ever) use. But here’s why the stakes are so high.

At issue is the question of “fiduciary duty,” for advisers who give you personal investment advice. If the advisers are fiduciaries, they have to put their client’s best interests ahead of their own. They’re not allowed to sell you expensive financial products in order to win a sales contest. The adviser also has to disclose all fees and avoid conflicts of interest.

Registered investment advisors are fiduciaries. Brokers aren’t. Neither are insurance agents.

Yet it’s far too early to declare victory or put on “party hats,” says Quinn. No, this sensible step that would bring customer expectations and broker reality into alignment could still be blocked or weakened. The two Republican SEC commissioners don’t like the idea. Industry is lobbying Congress for relief, too.

Quinn highlights an especially disturbing twist. If the fiduciary standard is adopted industry lobbyists want a very detailed definition.

But, but, but – advisers, including broker/advisers, have operated as fiduciaries for as long as 50 years, without needing definitions. “It’s a system based on principles, not rules,” says financial planner Harold Evensky, of the wealth management firm, Evensky & Katz in Coral Gables, Florida. Advisers know what it means to “put the client’s interest first” and “disclose all fees.” Detailed definitions could be fought over for years, he says. Worse, they could provide a road map for developing strategies that evade the rule.

This is just the kind of bad behavior too many players in the financial services industry have relied on for too long. Think credit cards and double-cyle billng. Subprime loans and options ARMs. Equity-linked annuities.

Hopefully, Congress resists the pressure and the SEC embraces the fiduciary principle. The change would be good for customers and for business. Read Quinn’s post and you’ll see just how high are the stakes.

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