There was a great column in the Wall Street Journal on Monday about the suitability vs. fiduciary standard debate, "Who will guard your nest egg?" by Jason Zweig. Mr. Zweig describes how brokers held to a suitability standard are under no obligation to inform investors of two huge pieces of information: their conflicts of interest and cost. He also cites overwhelming numbers suggesting investors aren't aware of this difference in standards (The Rand report he cites can be found here).
In Mr. Zweig's column, FINRA chair Richard Ketchum is quoted, saying "It's time to get to one standard, a fiduciary standard that works for both broker-dealers and advisers. Both should have a fundamental first responsibility to their clients."
He is right about putting the clients' interests first. The problem is that a fiduciary standard of care isn't meant to work for either broker-dealers or advisers, it is meant to work for investors. When investors can't even understand the difference in standards, it is clear the system isn't working. But the solution won't be any good if investors still are not able to presume that the investment advice they are receiving is only in their best interests.
The fiduciary standard doesn't need to be gotten to, it exists, and two of the fundamental precepts are that conflicts of interest should be avoided or carefully managed to the benefit of the investor and investment expenses must be controlled and accounted for. If the investment advice industry is ever to achieve the status of a trusted profession, the standard of care needs to be both clear and sufficiently high. As the regulators, legislators and the Obama administration begin to shape the new vision of who is protecting our nest eggs, they would be right to first remember who the fiduciary standard is supposed to work for.
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