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Analysis: Questions remain after SEC study on brokers
January 24, 2011 / 4:04 PM / 7 years ago

Analysis: Questions remain after SEC study on brokers

<p>Pointe Capital Management LLC managing member Chuck Huebner (L) takes part in a conference call with his Director of Administration Susan Doughty in his new office at Grosse Pointe Farms, Michigan March 23, 2010. REUTERS/Rebecca Cook</p>

WASHINGTON (Reuters) - Investors who rely on professional advice will not see any immediate impact from the Securities and Exchange Commission’s weekend recommendations that brokers be subject to the same fiduciary standard as investment advisers.

That is because the study, written by staff and opposed by two of the SEC’s five commissioners, faces a long and uncertain road to implementation and enforcement. Even if the SEC were to impose the fiduciary standard on brokers, there is enough ambiguity in the recommendations to leave advisers and their clients confused about how it will play out with respect to commission-earning brokers.

Advocates who support tough pro-consumer standards are urging individual investors to vet their own advisers without waiting for the SEC to sort everything out.

“They ought to ask their advisers some very tough questions and get the answers in writing,” said Ron Rhoades, chief compliance officer of Joseph Capital Management, in Hernando, Florida. Rhoades has been involved in the fiduciary issue as chairman of a policy group at the National Association of Personal Financial Advisors, an association of fee-only financial planners.

At issue is the current state of regulation, in which advisers are required to be fiduciaries -- always putting their clients’ concerns ahead of their own. Brokers, who typically are compensated for the financial products they sell, are subject to a lesser “suitability standard” that requires their recommendations be appropriate for their clients. That leaves brokers plenty of wiggle room to offer unnecessarily costly products that still “suit” the clients.

Confusing matters further, some firms call their brokers advisers. And the same person in the same firm can sometimes act as both a fiduciary adviser (offering a financial plan) and a broker, suggesting mutual funds that would implement the plan.


Investors who already have relationships with brokers, planners and advisers should question those professionals on how the SEC recommendations would affect their investments, say advocates. And they should nail down where their adviser stands with regard to conflicts of interest.

“Are you a fiduciary to me? And will you always be a fiduciary to me?” is the simple formulation suggested by Rhoades. The Committee for the Fiduciary Standard, an advocacy group dedicated to pushing for the uniform standard, is developing a list of questions consumers can ask their advisers, said Knut A. Rostad, the committee’s chairman.

He recommends investors ask their advisers these questions:

* Will you only recommend products in your best interest?

* Will you disclose all material facts, including disciplinary records?

* Will you control expenses?

* Will you avoid avoidable conflicts and disclose unavoidable ones, and manage them in the client’s favor?

That last question takes a hard line on the subject of commissions, suggesting that advisers who receive payments for recommending products like mutual funds kick those fees back to the client.

“In a true fiduciary world, those fees would be credited back to the investor’s account,” said Rostad.


Investors should also ask about how their portfolios would change in a post-fiduciary world, suggests P.J. Gardner, of AGW Capital in Tampa, Florida. He expects that the most expensive share classes of mutual funds, typically A, B, and C shares which levy various forms of sales charges, would be switched for cheaper versions of the same funds.

Many experts believe that the old model of high-commission financial products rewarding brokers who foist them off onto clients is already waning.

But commissions are not the only place where conflicts of interest can arise. Advisers whose pay is linked to a percentage of assets under management face a conflict when clients want to withdraw large amounts of those assets and use them to pay down mortgages or offer gifts to their children, says Rhoades. And advisers paid on an hourly basis may feel tempted to offer more advice and unnecessarily complex plans.

But the fiduciary standard requires that all such conflicts are resolved in the client’s favor.

Reporting by Linda Stern; editing by Matthew Lewis

Our Standards:The Thomson Reuters Trust Principles.
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