Why the broker fiduciary battle ultimately won't matter
A quiet battle has been going on recently regarding the "broker exemption" to the rule requiring investment advisers to adhere to a fiduciary standard of care with their clients.
The Investment adviser act, a more than sixty-year old piece of legislation, requires registered investment advisers to give advice that is "solely in the best interest of their clients."
Broker-dealer firms are exempted from this requirement and are instead subject to a "suitability" standard of care (ie, unless an investment is ultimately deemed "unsuitable," the broker has fulfilled his legal role, even if, for example, the investment lines his pockets more than another, perhaps, more suitable investment).
A grassroots effort has emerged within several of the financial planning community's trade organizations to lobby legislation that would "level the playing field," eliminating the broker exemption and requiring all financial practitioners to adhere to a fiduciary standard. If I haven't just lost you to a fit of narcolepsy, you can read more in this article.
While I support and applaud the effort, l don't believe legislation is required to bring about the desired change to the industry.
Why?
Because the change is happening now and is inevitable, with or without legislation. The solution is not a fiduciary standard of care. Who defines what is "solely in the best interest of a client" anyway?
If you asked ten different financial practitioners, you would probably get ten different answers, in the same way that ten different cardiac specialists might diagnose and treat a heart patient's condition in ten different ways.
The real issue is that financial institutions manufacture, distribute, and recommend investment products to the public in an environment of "information asymmetry." This is not unlike the day long ago when many doctors both wrote and filled prescriptions.
A fiduciary standard won't change the fact that a gross conflict of interest exists when an entity serves as both the producer and recommender/endorser of a product, particularly when that product is one that is complicated and misunderstood by most lay people.
But here's the good news:
- An alternative exists, namely independent, fee-only investment advisers operating solely in the realm of financial advice, away from the product manufacturing side of the industry.
- There is an increasing supply of advisers who operate this way as more and more practitioners become disgusted with the industry and start their own practices.
- There is an increasing demand for these advisers as consumers look for and find the alternative that serves solely their interests.
- The internet allows both parties to leverage technology and spread the word "virally," causing the new financial order to spread quickly.
Now the bad news:
If you are a financial institution, you need to quickly decide whether you want to be the doctor (advice-giver), the pharmaceutical company (product manufacturer), or the pharmacist (distributor) in this equation and act accordingly (and quickly). Because the day that you can egregiously "serve" the public in more than one of these roles is disappearing fast.
