Monday The Wall Street Journal published an article entitled “Obama Backs New Rules for Brokers on Retirement Accounts” (you can find it here). The gist of the article is the Administration’s efforts to establish rules that would better protect investors from unscrupulous behavior on the part of their investment brokers.
This is the problem: a broker is not an advisor. While you do not want a free-for-all broker community, you cannot make rules that go against the very nature of a role. Mingling issues of compensation and standards of behavior, the article shows that – willingly or not – there is still much confusion about this. And confusion invites political grandstanding. “If your business model rests on taking advantage, bilking hardworking Americans out of their retirement money, then you shouldn’t be in business,” says President Obama, adding that “Outdated regulations, legal loopholes, fine print, all that stuff today makes it harder for savers to know who they can trust.” President Obama advocates the extension of the “fiduciary standard” to brokers (on top of the already required “suitability standard”).
There clearly is a serious lack of concern for differentiating an advisor from a broker. If you’re shopping for a new car, your dealer – the “broker” – has the duty to sell you what you have agreed to purchase, in the conditions in which a new car is usually delivered. All the dealer needs to check is that you are good for the money and that you have a drivers’ license. He does not have to make sure the car you selected (optionals included) is the best fit for your driving objectives. That, if anyone’s, is the role of spouses or parents (for the young): they are advisors and automatically, because they love you, will apply a variation of the fiduciary standard in the matter.
In the world of investing there are those who need to be shepherded through the complexities of managing money in practically all its aspects. Advisors exist for just this purpose, and given the latitude of operational freedom enjoyed they should be adhering to a higher code of conduct (fiduciary).
There are also those who have their own ideas about what to do with their money, and simply need assistance in putting those ideas to work. A broker’s function is exactly that: to buy and sell what you wish. Like the car dealer, brokers will give you what you ask (provided it exists and is suitable), but they are not responsible for your full financial well-being.
“Outdated regulations, legal loopholes, fine print…” as President Obama says? Well, they are there for you to know and, in the case of the fine print, to read. We cannot be forcibly protected from our ineptitude or laziness. Or are we saying we should go after the ladies in the picture for “enticing” us on the “wrong” car?
Photo source: http://commons.wikimedia.org; Lamborghini Aventador.