In what should be landmark legislation to reform the financial system, there is a little known component of the proposed legislation that forces investment brokers (Broker/Dealers) to actually act in the “best interest” of their clients. That’s right, your broker will have to put your interests before the firm’s.
The Dodd-Frank Wall Street Reform and Consumer Protection Act that passed the Senate a week ago Thursday requires the Securities and Exchange Commission to conduct a six-month study on the impact of adopting a fiduciary duty for brokers. As I see it, that should be an easy study to conduct. If brokers are no longer allowed to abuse their clients in an effort to line their own pockets, the impact should be positive for individual investors.
Current law only mandates that brokers meet a “suitability standard”, requiring them to offer appropriate investment advice to their clients. A “fiduciary standard”, by contrast is a much higher standard and one which will allow investors to sue their broker if the duty is breached. The relatively small Registered Investment Advisor community (firms that charge a fee for advice instead of commissions) has owed their clients a fiduciary standard of care since the Investment Advisors Act of 1940 was signed into law more than sixty years ago.
Explaining what it would mean if the SEC were to impose a fiduciary duty on broker-dealers, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, told CNN that they would “for the first time … have to act in your best interests or you can sue them.”
Not surprisingly, industry executives are opposed to this legislation. Tom Currey, president of the National Association of Insurance and Financial Advisors told Politico “We frankly think, and thought from the onset, the suitability model under which broker-dealers are regulated works pretty well.” The question though is: “who does it work well for?” Clearly, it has worked well for the investment sales community but in light of revelations of the client dealings of major Wall Street firms such, it has been disastrous for the individual investor. It is high time that the brokerage community quit their self dealing and put the client’s interest first.
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