An investment advisor is required by law to act as a fiduciary for a client. But don’t tell that to the brokerage industry. As the law stands, brokers are only required to follow a less stringent suitability rule. There’s a battle going on in Washington to require stock brokers to act as fiduciary’s only for retirement accounts. The lobbyists for brokers are having a fit because they don’t want to follow the tougher fiduciary rules. It’s not difficult to see who’s paying who as Jason Zweig of The Wall Street Journal reports here:
“The DOL is clearly moving forward on a track that’s inconsistent with where the policy should end up,” Judd Gregg, the former Republican U.S. Senator from New Hampshire who serves as chief executive of the Securities Industry and Financial Markets Association, Wall Street’s main trade group, told me. “It’s a dangerously large expansion that will chill all kinds of activity.”
Mr. Gregg says it “would be a disaster, a nightmare,” if the DOL sets a separate fiduciary standard for IRAs.
“We don’t think the DOL is moving forward in a way that’s going to be constructive at all; it’s going to be destructive,” adds Mr. Gregg. “The folks with small accounts are going to lose the ability to get advice, and their costs will go up.”
The heart of the matter: Fiduciaries should avoid conflicts, but brokers are generally required only to disclose them.
“Having a completely conflict-free relationship doesn’t work in practice” across most of the brokerage industry, says John Taft, head of RBC Wealth Management in the U.S., which manages $250 billion.
For example, when your broker’s firm underwrites an initial public offering of stock, he and the firm earn far more by selling some of those shares to you than selling you something else. When your broker buys you a bond out of his firm’s inventory of your broker’s firm, rather than on the open market, the firm also tends to make more money.
Industry groups have argued that if brokers can’t have any conflicts, like earning higher fees on some investments than on others, then they no longer will be able to afford handling small accounts.
“The [brokerage] industry is saying, in effect, ‘If you don’t allow us to continue to give conflicted advice, we won’t be able to give any,’” Assistant Secretary of Labor Phyllis Borzi, who oversees retirement benefits, told me.
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