Consistent regulation of financial pros can only help

By ROI-NJ Editorial Board
New Jersey | Oct 5, 2018 at 7:00 am
Editorial

ROI-NJ’s readers, we suspect, know the difference between “investment advisers” and “brokers” or “dealers” of investment products. But not everyone does. Hence the value of Gov. Phil Murphy’s plan to apply the same legal and ethical standards to both types of financial professional.

Going all the way back to the Investment Advisors Act of 1940, investment advisers have been bound by a “fiduciary duty” to their clients. A fiduciary duty is the highest standard under the law. It means you have a binding legal obligation to put your clients’ interests first — ahead of your own. You must base advice on accurate and complete information, disclose any potential conflicts of interest and use a “best execution” standard to make trades efficiently at the lowest possible cost.

Violate your fiduciary duty — by, say, recommending a lousy investment simply because you will get a hidden commission or fee in return — and your clients are entitled to significant damages, even if they ended up suffering no harm.

But “brokers” and “dealers” — who also provide investment advice — are not subject to a fiduciary duty. The law holds them to a lesser standard, requiring only that the investment products they recommend be “suitable” for clients, considering their financial needs, objectives and circumstances. And that, as you might imagine, leaves a lot of wiggle room.

Investment advisers generally charge a flat fee or a percentage of the assets they manage. “Broker-dealers” are far more likely to receive their income in the form of commissions, creating the obvious potential for conflicts of interest. And, as Murphy noted, some broker-dealers receive “significant undisclosed financial benefits in exchange for steering clients toward certain investment products.”

The attempt to impose a federal fiduciary duty on all financial professionals nationwide has a long history.

After the 2008 financial crisis, the Dodd-Frank Act of 2010 required the Securities and Exchange Commission to study whether broker-dealers’ retail customers were well-protected, and, in 2011, the SEC staff recommended a uniform fiduciary standard.

By 2016, the SEC still had not acted on that recommendation, and President Barack Obama’s Department of Labor issued a rule imposing a version of the uniform standard. Then, in March 2018, a federal court struck down the rule on procedural grounds, and President Donald Trump did not challenge the ruling.

Trump, of course, campaigned on a platform of streamlining federal regulations, so it is no surprise he let the rule die. Murphy, on the other hand, is positioning himself as the “anti-Trump,” and plans to use the state’s Division of Consumer Affairs to impose a uniform fiduciary duty on all financial professionals in the state, including “broker-dealers.”

Murphy pegged his announcement to the recent 10-year anniversary of the financial crisis, saying his proposal would provide “the strongest investor protections in the nation.”

That’s a win for New Jersey consumers. And, if you ask us, it’s also a win for the entire community of investment professionals, who would see their profession elevated to one governed by the highest ethical and legal standards.

ROI-NJ Staff | editorial@roi-nj.com | @ROINJNews