Fiduciary Duty and Investment Advice: Will an Uniform Fiduciary Duty Make a Material Difference?
30 Pages Posted: 23 Jul 2014 Last revised: 12 Sep 2016
Date Written: January 15, 2014
Debates continue over whether stockbrokers ("Brokers"), primarily regulated under the Exchange Act, should be bound by the same fiduciary duties as registered investment advisers ("Advisers"), primarily regulated under the Advisers Act, when advising retail customers. This Essay discusses the current suitability standard governing Broker’s recommendations and the fiduciary standards governing personalized investment advice provided by Advisers.
While laudable, revisions to the suitability rule to explicitly require Brokers to act in the best interests of their clients seem unlikely to change behavior significantly. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 makes clear that even if the Securities Exchange Commission moves to harmonize the standards for Brokers and Advisers, a Broker’s commission "shall not, in and of itself, be considered a violation of [any fiduciary duty] applied to a broker-dealer" and that a broker-dealer would not be required to have a "continuing duty of care or loyalty to the customer after providing personalized investment advice about securities."
Given these limitations, it appears unlikely that true uniformity will develop with differing compensation structures and the absence of continuing duties for Brokers. More meaningful reform options include, passing a single statute to govern governing investment advice, limiting the distorting financial incentives created by uneven commissions, and making both private and public enforcement options more consistent.
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