November 8, 2010 / 4:40 PM / 9 years ago

Brokerages say fiduciary rule may impact choice

NEW YORK (Reuters) - Brokerage executives are worried that a higher standard of care for brokers will curtail investor choice and increase the cost of financial advice.

A dealer monitors her screens on the trading floor of IG Index in London May 6, 2010. REUTERS/Kevin Coombs

Executives told attendees at the Securities Industry and Financial Markets Association’s annual meeting on Monday that a fiduciary standard requiring anyone giving personalized financial advice to put their clients’ interests first may have unintended consequences.

“Our primary concerns are providing investors with choice and being able to do it in a cost effective way,” said James Allen, Chairman and Chief Executive Officer of regional brokerage firm Hilliard Lyons.

The Dodd-Frank Act directed the Securities and Exchange Commission to conduct a six-month study into whether anyone providing personalized financial advice should be brought under a uniform fiduciary standard. Currently brokers must only meet a lower “suitability” standard.

Chet Helck, Raymond James Financial’s Chief Operating Officer, said the practical implications of a higher standard need to be spelled out.

He pointed to the example of a client who had sold his business and kept a large amount of stock in his company. Even if the client wanted to stay invested in his former company, would a financial adviser be obligated to tell him to diversify his holdings because it is safer, Helck asked.

“A very strict interpretation could not accommodate activities that a client wants,” said Helck.

There is also a concern that the increased regulatory burden under a fiduciary standard will force brokers to charge more for financial advice, which may make it too expensive for some smaller investors, said Kent Christian, President of the Financial Services Group at Wells Fargo Advisors.

“For clients who fit a certain profile and below, it may be difficult for the firm to continue to serve them profitably,” said Christian.

The concerns echo a study SIFMA sent to the SEC last week showing the potential costs for clients if a strict fiduciary standard, such as the one currently governing investment advisers, is imposed.

The study, conducted by consulting firm Oliver Wyman, surveyed 17 brokerage firms overseeing a combined $6.8 trillion of client assets. It found that investors have historically paid 25 percent to 75 percent more for fee-based financial advice compared with paying commissions on a brokerage account.

It concluded that forcing investors with $200,000 or less to pay their adviser a fee based on their assets, rather than pay commissions for individual trades or product purchases, would reduce expected returns for the client by more than $20,000 over 20 years.

The Consumer Federation of America rejected the study’s findings in a letter to the SEC on Monday.

The CFA said that the Dodd-Frank Act specifically stated that charging commissions does not violate the fiduciary standard.

However, brokers should be required to provide better disclosures to clients about conflicts of interest they may have, including the fact that they may receive a higher commission for selling a certain product, and let the client decide which model suits them, the CFA said.

“(The study’s) authors either misunderstand or deliberately misrepresent the effect of imposing a fiduciary duty, invalidating the report’s conclusions,” wrote Barbara Roper, CFA’s Director of Investor Protection.

Reporting by Helen Kearney; Editing by Jackie Frank and Tim Dobbyn

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