Who could possibly be against eliminating a conflict of interest that costs American savers and investors $17 billion to $21 billion a year?  Who would even try to argue with a straight face that such a massive harm is actually a good thing for investors and savers?  The brokerage industry, that’s who. 

In the wake of the announcement of the Department of Labor's proposed “fiduciary duty” rule, which would require brokers to put their clients’ interests first (horrors!), much of Wall Street has labored to spread fear regarding the rule's potential effect.  The industry has asserted that investors are well-served as things stand now and that the imposition of the proposed rule will bring about undesirable results.  


The truth is that the industry’s entirely self-interested arguments in favor of conflicted advice are every bit as much of a flim-flam as you might expect.  Let’s take a moment here to separate fiction from fact in this costly issue for savers and investors:

Fiction #1:  Investors understand the difference between the services they receive from a stockbroker versus those they receive from an investment adviser. 

Fact #1:  Most brokerage firms’ retail customers don’t know the difference between brokers and investment advisers.  The simple truth is that more than three out of four investors don’t understand that the current laws and rules impose different duties on brokers and investment advisers, according to a 2010 survey conducted for the Consumer Federation of America (CFA), AARP, state securities regulators, and other groups. More recently, a 2015 study confirmed that most retail customers think their financial adviser – regardless of which type of advisor it is – is a fiduciary. 

Fiction #2:  Investors are content with the way things are now – there is no clamor for change. 

Fact #2:  Investors unwittingly suffer billions of dollars in losses each year due to conflicted financial advice.  As SaveOurRetirement.com has noted:  “Every single day that passes without a strong fiduciary duty means between $57 million and $117 million of retirement savers’ hard-earned money is lost due to conflicted investment advice, amounting to at least $21 billion annually.” According to a February 2015 report by the Council of Economic Advisers, Americans are actually suffering $17 billion in losses annually due to conflicted advice they receive from brokers posing as trusted finance counselors. 

Fiction #3:  The industry’s “suitability rule” is getting the job done

Fact #3:  When it comes to fighting investor claims in arbitration, brokerage firms consistently maintain that they have no obligation whatsoever to uphold anything resembling a fiduciary duty.  Without getting too far into the weeds here, suffice it to say that “suitability” is not the same as a “fiduciary” duty.  If it was, the brokerage industry wouldn’t be fighting the fiduciary duty rule tooth and nail.  FINRA, which regulates brokers, says that the suitability rule “does not obligate a broker to recommend the ‘least expensive’ security or investment strategy (however ‘least expensive’ may be quantified). . . .”  That is hardly the sort of protection that retirees deserve when handing their life savings off to a commission-motivated broker.  Perhaps the clearest evidence that a fiduciary duty places a stronger obligation upon a broker appears when investors file claims in arbitration only to have the industry deny any obligation to uphold a fiduciary duty. 

Fiction #4:  A bar on conflicted advice will limit investors’ access to affordable financial services products and advice. 

Fact #4:  There is no evidence that a fiduciary standard will mean fewer options for investors. In 2013, the overwhelming majority of industry participants in a fi360-ThinkAdvisor Fiduciary Survey said that extending a fiduciary standard to brokers “would not price investors out of the market for advice” and that “operating at a higher standard can save clients money over the long-term.”  Academic researchers and the SEC have also concluded that investors’ access to financial advisers and products will not be affected by a fiduciary duty rule.  

The brokerage industry wants to have it both ways today.  They want brokers whose every decision are driven by commission income to be able to pass themselves off as trusted advisers who are putting their clients’ interests first.   When those clients object in arbitration proceedings to the harm done to their nest eggs by conflicted advice, brokers want to be able to disown any fiduciary obligation.  This is very the definition of a broken system and it needs the fix that the Department of Labor rule is providing.  

Peiffer is a New Orleans-based arbitration attorney and president of the Public Investors Arbitration Bar Association (PIABA).