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The New Fiduciary Rules
by   Mark Wade  


As part of last summer’s Dodd-Frank financial reform legislation, the SEC was tasked with examining the rules for the kind of relationships financial advisors, stockbrokers, and other financial professionals must maintain with their clients. For many decades, financial advisors have kept a fiduciary duty with the people they serve, meaning that they are always pledged to put the interest of those clients first and foremost over any other concern. Brokers, on the other hand, have had the duty simply to put their clients into “suitable” investments.

Does that arrangement best suit the investing public? That’s what Congress asked the SEC to study. Perhaps the most alarming finding in the study was that a majority of investors are unaware of these differences. Financial services clients, in general, don’t know that their wealth manager is looking out for their best interests in a completely different manner from their broker. That may be why the SEC is now recommending that these two financial service providers should start giving their customers equitable service.

The idea of a fiduciary standard has been around for a long time now. The Investment Advisers Act of 1940 set forth a set of rules for financial advisors, which the Supreme Court interpreted to mean “an impartial and disinterested position, as free as humanly possible from the subtle influence of prejudice, conscious or unconscious.” In other words, we need to be in this business for your benefit.

As the financial advisory business grew in the postwar economic boom, this was an essential selling point: A true financial advisor wasn’t there to push you into products you didn’t want or need, but to take care of your financial needs.

Stockbrokers, though, have always been different. Their responsibilities were outlined by the 1934 law that created the SEC, which also charged them with recommending investments that were “suitable” for their clients. Historically, brokerage firms were simply functional in the buying and selling of stocks, and the investment advice they provided was described as "solely incidental.”

That changed in 1999, when the SEC allowed brokerage firms to offer fee-based accounts – as opposed to commission-based ones - without registering as investment advisors. With fee-based accounts, brokers were getting paid not specifically for each trade they made but for maintaining their clients’ money.

Brokers had started to become one-stop-shopping sources for financial advice. The repeal of the Glass-Steagall Act in 1999, which tore down many of the traditional barriers between financial-service providers and allowed banks and brokerages and insurance agents to be combined under one roof, accelerated this process. That’s one reason the SEC has taken this action; in the modern financial landscape, brokers have adopted many of the functions of a traditional financial advisor, without adopting the same responsibilities we operate under. The big problem is that many investors being unaware of just what sort of relationship they had with their financial service professionals. The SEC study confirmed what many of us already suspected: According to a survey that appeared in Investment News magazine last year, more than 60 percent of those investors surveyed assumed that brokers operated under a fiduciary standard. And more than 90 percent of those surveyed agreed that brokers and financial advisors should both operate under the more stringent standard. The SEC’s recommendation simply codifies the view that many people already had, and the view that nearly everyone thinks should be the standard for offering professional financial advice. This is only a first step; no rules have been passed yet. The SEC still has to write and pass an official regulation on all of this. But we feel that the financial professionals you entrust with your money should always have your best interest at heart. That’s the way we’ve always operated, and you should never settle for anything less.

For more information on the type of relationship we maintain with all our clients, give me a call at 908-647-6000 or send an email to


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