The Fiduciary Standard

The financial panic of 2008 begs for a political response.  Congress being Congress, and D.C. being the political cesspool that it is, I have little reason to think that the response we get, the Investor Protection Act of 2009, will actually solve any real problems with the additional government and added regulations that are passed, but the debate itself is interesting.  One of the most important debates is whether brokers will be held to the same fiduciary standard as registered investment advisors, like May-Investments, must currently meet.

A recent Washington Post article summarizes the discussion well, but notes the intense opposition of major Wall Street firms, naming Morgan Stanley and Merrill Lynch, specifically.  Now, why anyone is still listening to the culprits from the last fiasco is beyond me.  The financial behemoths blew themselves up with their recent financial shenanigans (a fate more typically reserved just for clients).  Taxpayers had to bail them out, though neither were supposed to have the financial backing of the U.S. government when they were making speculative bets on derivatives and underwriting sub-prime mortgage loans and selling the toxic paper into client accounts.  But still Washington dances to their tune.  It's rather disgusting, if you ask me, which (of course) you didn't.

Check out the article.  It's a great description of the debate.

The issue involves whether or not brokers will be held to the same fiduciary standard that investment advisors must currently meet.  One option being discussed is holding everyone to a "fiduciary" standard, but watering down the standard so brokers could meet it.  That would be a shame, and a sham, which makes it a very likely outcome.  The article notes that another option is to send it to the S.E.C. and study it to death. 

For my money, either investment advisors meet the current standard and are allowed to call themselves investment advisors, or they are not - and must call themselves investment brokers.  The problem is that brokers don't want to be called brokers, anymore, because of the bad reputation that brokers have.  They want to pretend to follow the fiduciary standard, and call themselves investment advisors, while still acting and being compensated for pushing product.

Now, let me say that "broker" is not, in and of itself, a bad word.  I work closely with Retirement Outfitters, which acts as an insurance broker.  What's make them good isn't the compensation structure, but rather how clients are treated within that structure.  Please know that I wholeheartedly believe that there are good brokers out there.

Still, it would be the ultimate irony if the IPA of 2009 is the instrument that brokers use to finally and officially dumb down one of the last real protections that consumers enjoy.  No new Washington department will ever be able to replace the loss of that legal standard.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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