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Wealth Management

Put Investors First

Brokers should be held to the same standards as financial advisers.

Knut Rostad is a member of the Committee for the Fiduciary Standard, a group of investment professionals lobbying to extend the standard to brokers who give investment advice.

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Do investors understand the distinction between an investment adviser and a broker who gives advice?

I don't think so. Brokers are governed by the suitability standard, which means that a broker has to demonstrate only that a recommendation is suitable. It actually makes more sense to say "not unsuitable" because a broker can make a broad range of recommendations under that standard. It's far easier to show that a security or mutual fund is not unsuitable than to demonstrate that it is in the best interest of the client. That's what advisers must do under the fiduciary standard.

Does everyone agree on what the fiduciary standard is?

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Unfortunately, no. My group views the fiduciary standard in the traditional way, which explicitly puts the burden on investment advisers to put investors' best interests first at all times. Another view suggests that the consumer protections of the fiduciary duty aren't as broad and deep. In this view, an adviser may have a duty to avoid conflicts of interest and to disclose them, but not to manage them in the best interest of investors.

What do you mean by a conflict of interest?

Take the choice between two mutual funds. One is a proprietary product and the other is not, and the costs to the consumer are considerably different. To manage that conflict, a fiduciary would be required to recommend -- other factors being equal -- the product with the lower overall cost. That's managing the conflict, versus just disclosing it and moving on.

A Treasury proposal would bring brokers and advisers under the same fiduciary standard and harmonize regulation. Would that solve the problem?

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If legislation harmonizes the fiduciary standard, there's no doubt that it will get watered down. Brokers claim they're willing to be governed by fiduciary duty, but in recent congressional testimony they fell short of agreeing to manage conflicts in an investor's best interest. And one proposal would allow investors to sign a document that waives an adviser's responsibility as a fiduciary. That's like going to a GM dealer and being asked to sign a statement that waives the state's lemon laws.