FINRA’s Mea Culpa & More On The Proposed Fiduciary Standard
The individual investor is the most important player in the financial markets, and unfortunately, our system has not sufficiently protected these individuals. We need to earn back the confidence of those investors by closing the gaps in our current system and strengthening oversight.
FINRA Chairman and CEO Richard Ketchum, testifying before the U.S. House of Representatives’ Committee on Financial Services on October 6, 2009
As noted above, Mr. Ketchum recently appeared before Congress to add FINRA’s thoughts on reforming regulation of Wall Street and, in so doing, offered the above concession. In fairness to Mr. Ketchum, there was not much else he could do as Madoff, Stanford, Lehman Brothers, Bear Stearns and others bad actors wrought havoc on investors from coast to coast. Mr. Ketchum also used this concession as a springboard to publicly support efforts to amend the regulatory structure to hold financial advisors to a fiduciary standard of care. I will explain what this means.
Presently, financial advisors must meet a “suitability” standard of care. That is, they have to recommend investments that are suitable for their clients after considering a host of factors, including their investment objectives, risk tolerance, etc. This is a lower standard than a fiduciary standard of care, under which one must act in another’s best interests. An investment advisor is held to a fiduciary standard of care. This difference is more than just mere semantics – investments that are suitable for an investor may not necessarily be in that investor’s best interests. Phrased differently, a financial advisor may recommend a perfectly suitable investment that is not necessarily the best product for his or her investor.
Mr. Ketchum is correct. This gap is substantial and provides the opportunity to game the system. While I am not certain at this point that applying a fiduciary standard throughout the industry is the correct fix, I am convinced that Congress should harmonize the two regimes. The boundaries that separate financial advisors and investment advisors have become increasingly blurry over time. Mr. Ketchum noted that 4,500 firms offer investment advisory and brokerage services; 88% of all registered investment advisors are also registered representatives (the technical term for financial advisors or brokers). Providing a consistent, clearly-explained standard will benefit professionals and investors alike. (October 22, 2009)
