The brash opposition to what's known as a "fiduciary duty" is but the latest reminder that the attentive advisers portrayed in the industry's marketing are the stuff of fairy tales.
For investors who have faced off against their brokers in arbitration, the arguments have a familiar ring. A common position brokers take in litigation is that they have no obligation to put customers first.
"These guys advertise like doctors and lawyers and litigate like used car salesman," said Joseph C. Peiffer, president of the Public Investors Arbitration Bar Association, or Piaba, a group of lawyers who represent investors in securities arbitration.
As things stand today, brokers need only sell "suitable" investments that match a client's investment profile. But they needn't act as fiduciaries who are duty-bound to put clients' interests ahead of their own, as investment advisers are expected to do.
Thus, a global equity fund weighed down with fat commissions and high management fees might make the cut as suitable for a client. But a similar fund with rock-bottom fees could be the pick that's in that customer's best interest. In the absence of a regulation demanding it, there's little motivation for a broker to peddle the latter.
The unsightly fiduciary battle that has Wall Street waging war against the idea of doing the right thing for its customers is being fought on two fronts.
There is, for starters, a squabble over creating a uniform standard that would apply to both the brokers and advisers overseen by the Securities and Exchange Commission. Mary Jo White, the SEC's chair, said March 17 that she supports the idea of putting the same demands on brokers and advisers. She reiterated that idea in testimony before the House Financial Services Committee today, adding that there will be "many challenges" in pulling it off.
One of those challenges will be dealing with the industry. Lobbyists at the Securities Industry and Financial Markets Association, or Sifma, have been plugging a dual standard that would be less strict than the requirements of the Investment Advisers Act of 1940 that governs advisers today. White has a choice: She can force brokers to meet advisers' current standards -- and incur the wrath and lobbying power of the brokerage industry -- or she can lower the standards required of advisers. An SEC spokeswoman declined to elaborate on White's plans.
The industry also has raised its hackles over a proposal endorsed by President Barack Obama on Feb. 23 to require a fiduciary standard for brokers who give advice on retirement accounts. Sifma has said that the president's proposal would cut off customers "on the lower end of the scale" from education and advice, which has a certain "We can't afford the pipsqueak investors if we can't sell them overpriced products" tone to it.
It's a laughable threat when you consider how competitive Wall Street firms are. Have you ever heard of a time when the financial industry didn't find a new way to peddle its wares after market conditions changed?
You can understand that the public might be confused about their brokers' roles. Firms large and small portray a caring image -- and studiously avoid using the word "broker" in their marketing.