Posted by: Lauren Young on July 9, 2009
Registered investment advisers, who are regulated by the Securities & Exchange Commission as well as individual states, are legally bound to put their clients’ interests first, known in industry-speak as a “fiduciary duty” or “fiduciary responsibility.” Brokers, who are regulated by the Financial Industry Regulatory Authority, or Finra, can recommend what is considered “suitable,” but not necessarily best, to clients. The term most used to describe this connection is a “suitability standard.”
Now a group known as the Committee for the Fiduciary Standard is asking two securities attorneys to look at how Congress can best put investors’ interests first.
The committee is targeting Thomas P. Lemke, managing director at Legg Mason, Inc., and Steven W. Stone, a partner at Morgan Lewis & Bockius in Washington D.C. These two attorneys wrote an article in the June issue of Wall Street Lawyer concluding that a so-called “harmonized” standard should replace the fiduciary standard for investment advisers, and the suitability standard for brokers. In other words, they argue, fiduciary and suitability standards are more similar than different.
Harmonization is long overdue, and this laudable effort’s overriding goal should be to ensure that investors receive a uniform level of professionalism and accountability from the financial professionals they deal with, whether they choose to use a broker-dealer or an investment adviser. An additional benefit of harmonization would be the increased potential that future Madoff scandals could be prevented or, at least, identified and stopped sooner.
The group, whose members include well-respected financial advisers such as Harold Evensky, Sheryl Garrett, and Ronald W. Roge, has created an online petition and is looking to collect signatures from 1,000 investors to make sure that new laws or regulations about the fiduciary standard meet what they deem are the requirements of an “authentic fiduciary standard.”
For tips on choosing an adviser, check out this BusinessWeek story, Finding An Adviser You Can Trust.
What do you think about these distinctions? Is there a difference between the fiduciary standard and sustainability requirements or can they be harmonized? Do you prefer one over another? Why?