Investors Score a Fiduciary Victory at Stockbrokers' Expense

It's best to read the 89-page regulatory overhaul after recuperating from surgery. Cool shoulder ice harness + 2 percocet = good news for investors.


Despite my problems with the government's plan, deep down underneath the dog and pony show, there is a breakthrough for consumers: brokers and other financial salespeople will soon be required to put the interests of clients first.

For too long, the financial services industry, led by then-FINRA chairwoman Mary Schapiro, effectively lobbied to allow brokers to operate under the less rigorous concept of suitability, which provided brokers the cover from doing the right thing. Under the carve out, brokers had to ensure that the investment idea they sold was suitable for the client, although they didn't need to inform clients if a better, cheaper alternative existed.

(For those keeping track, FINRA was the product of a merger between two non-governmental independent regulators of US securities firms, NASD, the NYSE.)

When Mary Schapiro left her lucrative gig at FINRA to become SEC Chairwoman (for a hefty pay cut to $160,000 per year), her point of view changed. Like the former camper-turned counselor, she knew the quickest way to address the industry's bad behavior. As a result, she shifted her stance and embraced the fiduciary standard, noting "I think investors would rationally say that they prefer fiduciary duty as the standard of care."

The fiduciary standard is defined as acting "in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and in a manner he or she reasonably believes to be in the best interests of the client."

In other words, in a fiduciary relationship, the clients' interests must come before the advisor's and/or the firm for whom he works. Sifting the details of the new regulatory proposals, at least in this one area, score a nice win for investors.