Should brokers be required to act in the best interest of their clients when providing personalized investment advice, including recommendations about securities, to retail investors? The answer to that question is close to a resolution. Financial advisers registered with the SEC are already held to this fiduciary duty known as the “best interest” standard. Brokers, however, are held instead to a standard of “suitability,” which means that they must reasonably believe that their investment recommendations are suitable for the investor’s objectives, means and age. The 2010 Dodd-Frank act ordered the SEC to study this issue and allowed it to establish a fiduciary standard for brokers. SEC Chairman Mary Jo White said the commission would make a decision by the end of the year.

Advocates of a fiduciary standard for brokers assert that investors do not understand the rules in their current iteration, which allows for abuse by brokers who are keen on selling products that give them a commission, whether or not those products are in the best interest of the investor. With the suitability standard, brokers can recommend the worst of whatever is available that is suitable, but applying the “best interest” standard to brokers would add to compliance and liability costs, which would likely trickle down to the investors. Critics of the “best interest” standard also argue that the products available to investors would be greatly limited if the standard is applied.

Many in the brokerage industry say that if the fiduciary standard were applied to brokers then it should allow for more flexibility than the standard that investment advisers operate under in order to preserve customer choice by not limiting the range of products that brokers can offer. Some fiduciary-standard advocates are concerned that regulators are headed toward a middle ground that they fear will fall short of what is necessary.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-741-7503 to discuss your potential legal remedies.