by Svitlana Vodyanyk
Studies have shown that consumers are generally unable to distinguish between investment advisers, whose primary purpose is to provide advice about securities, and stockbrokers, whose advice is considered incidental to the sale of financial products. Most investors are unaware that stockbrokers and investment advisers are held to different standards.
Investment advisors are regulated by the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940 as fiduciaries, and a fiduciary standard of care is applied to the advice given to their clients, whereas stockbrokers are regulated by the Financial Industry Regulatory Authority (“FINRA”) under the Securities Exchange Act of 1934. Unlike investment advisors, stockbrokers are not fiduciaries. Their recommendations must be suitable, but they are not held to the same standard of care. However, some states do impose a common law fiduciary standard on stockbrokers providing services to clients.
The SEC is concerned that few investors realize that the standard of care they receive depends on the type of investment professional they use, and that often investors do not know whether they are working with a stockbroker or investment advisor. Many broker-dealers refer to their stockbrokers by terms such as “financial planner” or “financial consultant,” suggesting their services include planning or consulting services that involve the provision of expert advice.
In response, the SEC is considering imposing the same fiduciary obligations on stockbrokers that investment advisors are required to follow. This would require that stockbrokers act in their client’s best interest and make recommendations that do the same.
On March 1, 2013, the SEC published a “request for data and other information, in particular quantitative data and economic analysis, relating to the benefits and costs that could result from various alternative approaches regarding the standards of conduct and other obligations of broker-dealers and investment advisors.” This request will help the SEC determine whether to harmonize the fiduciary obligations of stockbrokers and investment advisors when providing personalized investment advice about securities to customers.
Supporters of imposing a fiduciary standard on stockbrokers argue that the requirement would force stockbrokers to offer retail customers the lowest-cost alternative, to stop pushing proprietary products, to charge asset-based fees, and to monitor their client’s accounts.
While the SEC is particularly interested in receiving empirical and quantitative data, all interested parties are encouraged to submit comments, including qualitative and descriptive analysis of the benefits and costs of potential approaches, and guidance. Commenters should only submit information that they wish to make publicly available. The public comment period will remain open until early June 2013.