Debate is heating up about whether stock brokers and insurance salesman should have a fiduciary duty to their clients—that is, whether they should be required to always act in a client’s best interest or whether they must simply recommend investments that are “suitable” (the current, lower threshold).
The financial regulatory reform bill that the House already passed made this change, but things have gotten bogged down in the Senate, thanks in large part to lobbying on the part of banks and insurers. That’s probably because unlike the House bill, which requires the SEC to set a new standard for brokers, the Senate version would simply bring brokers under the same umbrella as investment advisers—ostensibly a higher bar.
A recent Bloomberg article captured both the debate and the reason certain policy makers think a change is needed:
Investors have difficulty distinguishing between investment advisers and brokers, and most see their brokers as advisers, according to a 2008 Rand Corp. study commissioned by the SEC. Without the fiduciary requirement, brokers don’t have the same accountability for their advice as investment advisers and have more leeway to sell financial products created by their own firms instead of seeking the best investment for the customer.
What often makes matters worse is that the same person giving investment advice might also be selling, say, variable annuities. In the first capacity, he is an advisor with a fiduciary duty; in the second he’s a salesman without one.
My question in all of this isn’t whether or not fiduciary duty is appropriate, but whether it goes far enough. Since 1979, mortgage brokers in the state of California have had a fiduciary duty to the people they’re providing with home loans. That didn’t do much to stop the real estate free-for-all.
The imposition of fiduciary duty is meant to give individuals legal recourse should a professional not act in his client’s best interest. That’s fine, but it’s punitive, not proactive. It seems what we also need to go along with this is a better way of tying the economic fate of a financial advice-giver to that of his client.
In high finance we now have the notion that banks should have to retain a certain ownership stake in any assets sent out to be securitized. Link the ultimate performance of the asset back to the institution creating it and you’ll probably get better quality stuff, the thinking goes.
I wonder if there could be an equivalent for people suggesting which stock and insurance products to buy.