The Brokerage Industry is Winning its Fight Against Financial Reform


In a recent article, “Brokers Win, Investors Lose Key Reform,” Wall Street Journal columnist Jason Zweig wrote that the financial reform bill pending in Congress was likely not to require securities salesmen to operate under a fiduciary standard of conduct, because it has been horse-traded away. He explained that investors should be very concerned about this because, while a fiduciary is required to place his client’s interest ahead of his own, the typical stock broker might not have to comply with this standard. At the time Zweig predicted that, instead of calling for a fiduciary standard of conduct, the bill will call for ? a study.

Zweig was right. Dodd unveiled his bill on March 15th. No fiduciary obligation. Instead ? an SEC study of the costs and benefits of a fiduciary standard.
Also on March 15th, a group of luminaries, including two Noble Laureates in Economics and John Bogle, founder of Vanguard, released this letter calling for the fiduciary standard in financial reform legislation:

“We believe the future well-being of the nation requires that all Americans increase their savings and make the best possible investment choices. As investing has become more complicated, the role of advisers or brokers has become more vital. Investment Company Institute research found 73% of investors consulted a professional financial adviser before investing in a mutual fund. Unfortunately, not all financial advisers are required to be fiduciaries, who, by law, must put the client’s best interests first.

Therefore, we believe that all those who render investment or financial advice must meet the requirements of the fiduciary standard, as established under the Investment Advisers Act of 1940 and affirmed by the U.S. Supreme Court.

The fiduciary requirements of the Advisers Act are well established in case law, regulations and regulatory interpretive letters. The key overriding mandates are highlighted in five core principles. These principles are:

  • Put the client’s best interests first
  • Act with prudence; that is, with the skill, care, diligence and good judgment of a professional
  • Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts
  • Avoid conflicts of interest
  • Fully disclose and fairly manage, in the client’s favor, any unavoidable conflicts.”

Why are brokers and insurance agents putting up such a fierce fight to avoid being held to such a standard? The question almost answers itself.