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The Prize for the Fiduciary Standard:
Global Market Leadership
By Stephen Winks
November 6, 2012

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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives. 

Tough times in the brokerage business are about to get tougher. A difficult investment environment and damage to its reputation are threatening the industry, and now it faces regulatory challenges under Dodd-Frank as it evolves from its current sales-driven culture to a professional services culture focused on advice and the fiduciary standard. Bold leadership will be necessary to navigate this challenge; without it, the brokerage industry and their clients will suffer.

Dodd-Frank holds brokers to the same fiduciary duties and consumer protections afforded by an advisor.  That portion of the legislation, unfortunately, has yet to be enforced.

An inexorable retooling of the industry is upon us. It’s triggering substantial industry pushback, with so many brokers unaccustomed to rapid change, but it must proceed; this vital transformation is essential to advance modernity, the best interests of the investing public, and the professional standing of the advisor.  It will usher in extraordinary increases in advisor productivity, an unprecedented level of investment and administrative counsel and far better earnings, margins and valuation multiples for the industry.

This transformation has gone global, now that the UK has outlawed commissions effective January 1 and will hold brokers to the fiduciary standard of care. This aggressive action by the English makes the fiduciary standing of the broker – and the consumer protections it affords – a phenomenon which will determine global market leadership in an increasingly small world.

At play are two competing views of the role and responsibilities of the broker, which will ultimate determine how they are differentiated from advisors:

  1. The broker is just making clients aware of their investment alternatives, with no investment advice being rendered, intended or implied.  This brokerage industry convention leaves the consumer to his or her own devices to determine the merits of an investment, no matter how limited his or her investment knowledge and experience may be. The industry posits that if no advice is rendered, neither the broker nor the broker/dealer firm responsible for the broker’s recommendation are subject to any fiduciary liability. The broker’s role and compensation are based on his or her ability to facilitate trade execution, not to render advice, which would in fact be a violation of the employing broker/dealer’s internal compliance protocol. The broker is not accountable for, nor has any ongoing responsibilities stemming from, any advice rendered, which is considered incidental to the clerical trade execution services provided. 
  2. Alternatively, brokers would function as advisors and would be accountable and responsible for rendering expert personalized advice. That advice would be in the best interest of the investing public based on objective, non-negotiable fiduciary criteria, which in turn are established by statute, case law, regulatory opinion letters and best practices. Here, conflicts of interest are eliminated. An broker would provide individualized personal advice on how a recommendation affects the client’s holdings, based on criteria such as risk, return and tax efficiency.

There’s quite a disconnect. There is a big difference between sales and professional services. It is the difference between a broker who is not accountable or responsible for their recommendations and an advisor who is. Which view prevails will determine global financial services market leadership.

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