Fiduciary Standard Endorsed by Wall Street

An utterly improbable thing occurred last week when Wall Street endorsed the fiduciary standard for brokers. This is certainly a sea change for investors. A fiduciary standard similar to that which governs so-called “financial advisors” is something I’ve advocated for years. The new standard forces brokers to put customer interests ahead of their own, which seems logical enough even though up until now Wall Street fought against the issue tooth and nail.

But last week SIFMA, Wall Street’s lobbying group, got behind the idea which almost assuredly means Congress will turn it into a law. It’s long overdue and Congress should quickly pass legislation, lest Wall Street get cold feet.

The fiduciary standard goes to the core of the relationship between individual investors and Wall Street. Wall Street is not just selling a product. There is a professional relationship. The relationship is much less like a car salesperson and buyer as much as it is like a doctor and patient where the diagnosis is just as important as the prescription.

That is why applying a fiduciary standard to the broker-customer relationship is so important. Wall Street enjoyed having it both ways, especially when it came to disputes. It’s undeniably common sense that a retiree should never be recommended speculative tech stocks or auction rate securities and other structured products. But if that retiree filed a case against the broker who recommended the bad investment, Wall Street wouldn’t deny that it was wrong, but would argue that technically the broker didn’t have to put his client’s interest above his own. Going forward the onus is on the broker to defend the recommendation as meeting the fiduciary standard. The burden of proof is back on Wall Street.

Earlier I posted about a recently leaked memo from SIFMA about their plans to improve Wall Street’s image. Actions, such as adopting the fiduciary standard is an important first step and will go further than spin. Much more action on the part of Wall Street is necessary before Main Street’s trust can be restored.