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Random Thoughts on Fiduciary Duty to Investors

For some time now, there have been discussions about the application of the fiduciary rules to those working in the financial industry. The rules apply to those who are registered investment adviser representatives but are not applied to brokers, who operate under the much different suitability rule. The debate has been entertaining.

No matter what the outcome of proposed legislation to expand the rule, any investor would be well advised (pardon the pun) to remember that just because someone claims they are a fiduciary does not mean that they will act as such in their relationship with you. Similarly, just because there is a rule imposing a fiduciary duty on someone in the industry does not mean that they will obey it. And of course there is always the possibility that people do not understand the rule even if they think they want to follow it.

One common argument against expansion of the rule to brokers is that the result will be a large pool of small investors who will not be receiving advice because of the costs and burdens brokers will not choose to bear. Leaving aside the fact that investment selection is only a small part of financial advising, it might be wise for the brokers to remember that robo advisers will fill that gap nicely. They can offer an effective allocation to these “underserved investors” at a lower price and without the inherent conflict brokers experience.

Another thing to consider is simply forcing much more robust disclosure – no fiduciary duty per se – on brokers concerning their products and the cost. Let the market sort it out as it does in other industries. Frankly, if a product is so undesirable that it takes a huge commission to get someone to sell it, that product should lose out to better products. This certainly applies to high cost active funds, many insurance products and other high cost investments that tend to benefit the seller while leaving the buyer in uncertainty.

Whatever your position on the discussion about fiduciary duty and investors, remember that if your client has any sense, they are going to ask you to serve them and expect to be treated fairly. If you don't, that may come back to haunt you. 

1 Comment to Random Thoughts on Fiduciary Duty to Investors:

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Stock Advisory Company on Wednesday, March 8, 2017 5:31 AM
This is an excellent post written by you, thanks for sharing the informative and great post.
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