The broad investing public isn’t exactly riveted by the controversy surrounding the so-called “fiduciary standard,” but they should be. To understand why, here’s some quick background, vastly simplified.(1)

For nearly 75 years, registered investment advisors (RIAs) have been subject to a fiduciary standard of care as specified in the Investment Advisors Act of 1940. The fiduciary standard means just what you’d expect it to mean: an RIA has to put its client’s interests ahead of its own, is bound by the duties of loyalty and care that also apply to traditional trustees, and has to disclose conflicts of interest.

Stockbrokers and broker-dealers, on the other hand, have always been subject to the loosey-goosey standard of “suitability.” Suitability means, “I can rip you off twenty ways to Sunday as long as I disclose it in the fine print or you forget to ask me the right questions.” The suitability standard is a legacy from the long-ago days when brokers didn’t give advice but only executed trades.

To make matters worse, a great many firms, especially larger ones, are dual-registered monsters. They register with the SEC so they can tell prospective clients they’re fiduciaries, but they also register as brokers in case they later want to rip those clients off.(2)

So why would anyone ever choose a broker over an RIA? Because otherwise how could a fool and his money be soon parted?

Naturally, I’ve personally been delighted with the distinction between RIAs-as-fiduciaries and brokers-as-rip-off artists(3) because I work for an RIA (Greycourt) and it gives us a huge competitive advantage.

But things started going off the rails with that magnificent piece of smug idiocy otherwise known as Dodd-Frank. Section 913 of Dodd-Frank is a perfect example of good-intentions-gone-wrong because the well-intentioned fools who wrote and enacted the legislation were too busy feeling swell about themselves to think straight.

§913 required the SEC to study the question whether RIAs and brokers should be subject to the same standards. Naturally, you’re thinking that this would require brokers to step up to the plate and take fiduciary responsibility for the recommendations they make. But note that it could also work the other way ‘round: RIAs could have their fiduciary standard watered down to something the brokers could live with. (Note to Dodd-Frank enthusiasts: think before you enact.)

And damned if that isn’t just what the SEC has in mind. The Commission dutifully conducted the study Dodd-Frank required it to conduct, and the study dutifully discovered that “many investors are confused by the standards of care that apply to RIAs and [broker-dealers].”(4)

But did the SEC simply extend the fiduciary standard of RIAs to brokers? No! What the SEC apparently intends to do is to create some diluted version of the current fiduciary standard (or, more likely, some modestly beefed-up version of the suitability standard) and to apply it to RIAs and brokers alike.

If the SEC exists for the sole purpose of protecting the investing public, why would it do such a thing? The answer lies in a bunch of acronyms: FINRA, FSI, NAIFA and SIFMA. See my next post.


(1) Full disclosure: Your humble blogger has been invited to join a group of folks who will assist The Institute for the Fiduciary Standard in developing fiduciary best practices.

(2) See Christopher Carosa, “Will Broker Evolution Obviate the Fiduciary Standard Debate?” Fiduciary News, April 18, 2012, available at  An SEC enforcement action against a dual-registered advisor-broker is a textbook case of the dangers associated with dual registration, and, more broadly, of the dangers associated with imagining that brokers and advisors could coexist under the same regulatory scheme. See In the Matter of Arlene Hughes, SEC Rel. No. 4048.

(3) I know, I know, there are brokers who are honest-as-the-day-is-long and who provide terrific advice and counsel to their clients. There are also sweet-tempered pit bulls, but that doesn’t mean I’d climb into a cage with one.

(4) A study by Cerulli Associates, for example, found that 63% of investors who work with wirehouse brokers think their brokers are subject to a fiduciary standard. See Andrew Clipper and Benjamin Poor, “Broker-Dealers as Fiduciaries? How the SEC Staff’s Study Could Raise the Bar for Investment Advice,” available at


Next up: (Prepare to be Ripped Off, Part 2)

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.


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