I have been following the debate in Congress about a fiduciary standard. Here is another article from the Wall Street Journal discussing this very topic. The article begins describing the standard, which essentially means a legal requirement to put your client’s interest first, above all others, including your own.
At issue is whether a financial adviser—which nowadays means anybody from a stockbroker or insurance agent to a financial planner or “wealth manager”—should be held to higher standards of conduct.
Many brokers and insurance agents are obligated only to have reasonable grounds for believing that any investment they recommend is “suitable” for you. They need not inform you of conflicts of interest that might bias their judgment; you might never find out, say, that they sold you a particular fund primarily because it paid them a fatter commission than others would have.Other financial pros, however, bear a “fiduciary duty,” meaning that they must put their clients’ interests ahead of their own and disclose potential conflicts. After the rolling calamities of the past decade, wouldn’t this be an improvement over business as usual?
A measure in the Senate’s earlier reform bill would have imposed a fiduciary duty on all financial advisers. It has been superseded by one that would merely study whether the current standards are adequate. An amendment introduced last week would exempt many insurance agents, and brokers selling their firms’ own products, from being fiduciaries.
What is interesting about this article is it continues to say that maybe Congress doesn’t have the right stuff to grasp this concept. Many in Congress seem to make numerous trades or works with broker who churn their accounts. One Senator discusses how he trades after watching Jim Cramer of Mad Money fame.
Some members of Congress permit brokers to trade their accounts hundreds of times a year; others trade too much themselves. The accounts of 38 members of Congress or their spouses showed at least 100 trades apiece in 2008, according to public records; 15 had more than 300 trades each.
This isn’t surprising as most people don’t really understand that two worlds of financial planning exist: the broker or salesman and the fiduciary. There are only about 13,000 SEC registered fiduciaries in the U.S. out of 600,000 advisors so it is a small group. Once folks understand the difference, I find they never go back to the “dark side” of financial planning. Here are some videos where I describe how Wall Street really works: