Fiduciary Duty Op-Ed
(611 words)
Investors Deserve the Highest Standard of Care
As investors struggle to regain their financial footing under the weight of the ongoing
economic crisis, Washington is awash in proposals to rebuild the nation’s financial regulations
and usher in a new era of responsibility in financial services.
While this vital policy discussion plays out, investors would be wise to watch for
attempts to water down any rules currently in place to protect them.
A case in point is the recent push by the securities industry to convince lawmakers to
provide a “universal standard of care” for all investors based on fair dealing. Who could argue
with that?
But, as with many innocent sounding proposals that come out of Washington, there are
clear and present dangers beneath the surface. There is regulatory concern that the universal-care
standard would provide very little protection for investors, who really need regulation that
requires the financial services industry to act in the best interests of its clients.
Investment services providers not only offer different services, they also are subject to
different federal and state regulatory requirements and have different legal obligations, or
standards of care, to their customers.
Over the last two decades, the lines between those who provide investment advice and
those who sell investment products have blurred and most investors do not understand the legal
obligations of each service. Today, an average Main Street investor is confronted with a vast
menu of different financial products and an equally long list of professionals to help them meet
their financial goals. But not all financial services professionals have the investor’s needs at
heart.
There is concern that brokers may be pressured by the bosses to suggest risky
investments or to unload toxic assets. For example, auction-rate securities were aggressively
marketed to investors as being as safe and liquid as cash, when brokerage firms knew the ARS
market was in trouble and were scrambling to reduce their inventory.
The obligation to always place the customer’s interest first is known in legal terms as the
fiduciary duty, the highest standard of care recognized under the law. Someone acting as a
fiduciary also must provide up-front disclosures about their qualifications, how they are paid,
their disciplinary record and any possible conflicts of interest.
Applying a fiduciary duty to all financial professionals would lessen the incentive to
value the bottom line over customer satisfaction and would put the interests of investors squarely
where they need to be – first and foremost.
Investment advisers must act as fiduciaries, but stock brokers generally are not required
to meet this same legal standard of care when working with customers. Instead, brokers consider
their customer’s age, tolerance for risk and other factors to determine the financial products that
are suitable to their financial needs. They also do not have to provide the same up-front
disclosures required of investment advisers.
The Madoff Ponzi scheme and other high-profile breaches of trust between financial
professionals and their clients serve as stark reminders of the need for strong standards of
conduct in the financial services industry.
As Congress considers how to modernize financial services regulation and better protect
investors, it makes sense to extend fiduciary duty – the highest standard of care under law – to all
financial professionals who give investment advice about securities, stockbrokers and investment
advisers alike.
Not only would this strengthen investor protection, it would also eliminate confusion and
promote regulatory fairness by setting conduct standards according to the type of services
provided, not the licensing status of the provider.
For all financial professionals, the interests of the client must come first at all times.
Investors deserve no less.
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