To Reform or Not to Reform
Consumer advocates are taking quite the beating in Washington. They have it on good authority that a key item in the legislation will be completely absent when the financial reform bill hits the senate floor. They say it is the single most important item, that could impact main street, that would be a real “change”.
That key item is simply this – a requirement for stock brokers and insurance agents “to act in the best interest of their clients” — was part of a 1,100-page draft bill unveiled by Senate banking committee Chairman Chris Dodd (D-Conn.) in November. Behind closed doors, industry and consumer groups have lobbied members on the issue. Meanwhile, much of the public debate has focused on oversight of big banks and the creation of a consumer protection agency.
“It happens to be the single most important provision in the legislation to enhance protection for average investors,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “It’s not done until the bill is finally written.”
As it stands now, investment advisers are required to act as “fiduciaries,” legally and ethically bound to put a client’s interest ahead of their own. In comparison, brokers are required to have “reasonable grounds” to believe that a product they are recommending is “suitable” for the customer.
Typically, brokers do not have to make as many disclosures about conflicts of interest, fees and past infractions as investment advisers. The different standards exist because the Investment Advisers Act of 1940 makes an exemption that spares brokers from registering as advisers as long as the advice provided to clients is “solely incidental” to selling products.
Good old Chris Dodd.