The Labor Department is contemplating overhauling the standard of care owed by brokers to their clients. Under the new plan, brokers would owe their clients a “fiduciary duty” which means they would be required at all times to give advice that is in the best interest of each client. Under the current “suitability” requirement, brokers can meet their legal obligation by giving advice that is merely consistent with a client’s risk tolerance and current circumstances, but that advice need not be in the best interest of the client. An immediate implication is that brokers can (and often do) direct clients to investments that are appropriate from a risk perspective, but may carry higher than necessary fees. (As an aside: Financial advisors employed by registered investment advisory (RIA) firms already owe a fiduciary duty to clients.)
What are the implications for consumers? Forcing the higher level of duty on those who provide financial services should be a positive move. Many consumers have been harmed by the current system, partly due to ignorance – a lot of people aren’t even aware that brokers don’t have to give them the best advice. Ideally, the proposed changes will do away with such confusion. Consumers will have greater certainty regarding the obligations of all retail financial advice providers.
It is expected that the brokerage industry will continue to fiercely contest any upcoming changes. The main thrust of their counterargument is that a higher level of duty will lead to higher fees (to compensate for the additional regulatory burden). This is the typical argument made by such firms whenever regulations are debated. The bottom line is that today people are paying too much for not very good advice. Paying too much for better advice is at least a step in the right direction. I would also argue that brokers are paid too much, so there is room in the system for better advice and lower fees.
Do you have a question about financial advisors and/or brokers and their standards of care?