There are many areas of concern and conflict between the banking business and government these days. Debtor nations have fallen into bed with their bankers and now find themselves perilously tied in co-dependent positions they would not otherwise have chosen.
A large number of bank/brokerage bosses have gone into government after they have cashed out on Wall Street. The nepotism is blinding. But just as this sorted tale seems most insipid the Obama administration tossed in a hand grenade last week with a proposal for financial regularoty reform that includes an elevation of bank owned brokers to the standard of fiduciary duty when advising clients.
I write about the importance of legislating a fiduciary duty for financial advisory firms in Juggling Dynamite.
Up until now most investment sales people in the world have only answered to a “suitability” standard meaning they need only show that they had reasonable grounds for thinking that an investment product may meet a client’s needs. In other words if a product increases in value, the broker/dealer/advisors will take credit for the brilliance of the increase, but if a product loses value, they are in no way responsible for the losses. But fiduciary duty goes a whole lot further than this:
“Many investors don't even know the difference between the two standards, believing their brokers already are acting in their best interests.
But requiring brokers to operate under a fiduciary standard could force them to offer products that are less costly and more tax-efficient. They will have to disclose any potential conflicts of interest, such as any fees they may get for favoring one product over another. That could mean clients will be offered fewer proprietary products if the broker can find a lower-cost option elsewhere.
For example, a broker couldn't put you in a mutual fund with higher fees — or one he gets a bigger commission for selling — if he could get a comparable fund with lower fees elsewhere, says Tamar Frankel, an expert on fiduciary law at Boston University School of Law.” See WSJ: Big Cange in Store for Brokers.
This would be a big development if it goes through. The investment/finance world will be shocked to learn all the things they have been doing which would no longer be deemed a sufficient duty of care to clients. And if the US adopts this new standard, Canada and other developed countries will be shamed into making similar changes. This will be a big one for consumer protection.
Cory’s Chart Corner
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