FIDUCIARY DUTY: THE DIFFERENCE BETWEEN BROKERS AND ADVISERS

by Christopher J. Gray on August 25, 2011

in FINRA Regulation,SEC,Securities Fraud

Financial advisers are bound by their fiduciary duty. Put simply, fiduciary duty is when one party (in this case, the financial adviser) must, by law, act in the best interest of another party (in this case, the client). Financial advisors have a legal obligation to act in the best interest of their client as they are entrusted with the care of their money. If a financial advisor does not adhere to his or her fiduciary duty, then securities arbitration can be brought against that person.

Fiduciary duty: the difference between brokers and advisers

Broker-dealers, on the other hand, only must adhere to the far less rigid “suitability standard.” This means they only have to make “suitable” recommendations. This makes sense in the old view of a broker as a salesman. After all, a clothing retailer isn’t required to only sell you jeans that don’t make you look fat. However, brokers aren’t simply salesmen anymore. Especially in recent years, the line that separates brokers from advisers has grown fuzzy and all but disappeared. Advisers buy for their clients and brokers advise clients in their purchases. It is for this reason that many believe that brokers should be held to the same, or at the very least similar, standards as advisers.

In January of this year, the SEC recommended that brokers be held to a common fiduciary duty as advisers. According to the SEC’s Study on Investment Advisers and Broker-Dealers, “Broker-dealers and investment advisers are regulated extensively, but the regulatory regimes differ, and broker-dealers and investment advisers are subject to different standards under federal law when providing investment advice about securities. Retail investors generally are not aware of these differences or their legal implications.”

Concerns about changing the regulation of broker-dealers come from the belief that such changes will disturb or damage current business models and that the choice, customer service and product access of retail customers could be negatively affected. The Securities Industry and Financial Market Association’s proposal to the SEC would have a uniform standard for broker-dealers and advisers but would be applied separately, allowing brokers to sell products with the stipulation that they must disclose any conflicts of interest. Under SIFMA’s proposal, advisers could continue their current standard of operation.

In an interview this month, SEC Chairman Mary Schapiro stated that the SEC is “starting to gear back up to have meetings,” is preparing to outline the rules and hopes a proposal will be enacted sometime in 2011.

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