Will Brokers Bow to Higher Fiduciary Standard?

U.S. regulators’ push to make stockbrokers more accountable to clients could end brokerages’ sales of proprietary or high-fee products.


When John Thiel recently addressed the Securities Industry and Financial Markets Association in Chicago, the head of Merrill Lynch Wealth Management grabbed the attention of the entire advisory business.

Thiel announced that his firm, a Bank of America Corp. division that employs the largest group of full-service financial advisers in the U.S., favors proposed rules to hold securities brokers to a higher fiduciary standard. “Besides being the right thing to do, it will be good for business,” he said in remarks that some pundits dismissed as a capitulation to political critics. (Thiel had no comment to Institutional Investor on the planned regulatory change.)

One of the most hotly debated topics in wealth management is the role of the stockbroker. On April 14 the Department of Labor, which oversees regulation of retirement products, entered the fray by unveiling a White House–backed plan to make registered representatives of brokerages meet the same standard as those overseeing client accounts at registered investment advisers.

For centuries brokers were the main service providers in the retail investment business, buying and selling stocks and bonds for well-heeled clients in return for a fixed commission approved by the exchanges. This model remained largely intact until Mayday — May 1, 1975 — when the New York Stock Exchange formally ended fixed commissions, ushering in competitive pricing. Another Merrill executive, former chairman and CEO Donald Regan, was criticized by some competitors for publicly supporting the shift.

The rise of fee-only RIAs in the 1990s put great pressure on traditional wire-houses. Fee-based advisers argue that they’re unbiased because they choose investments for their clients without any incentive to execute unnecessary or inappropriate transactions; traditional brokers retort that they can provide invaluable services for wealthy individuals, such as access to initial public offerings and complex capital markets solutions, that a fee-only adviser cannot.

An adviser at an RIA must always make the investment recommendation that he or she believes is in the client’s best interest, but under the current U.S. regulatory regime a broker need only ensure that a product is “appropriate” for the client. Retail investment fads such as master limited partnerships in the 1980s, Internet stocks in the ’90s, and variable annuities and private real estate investment trusts in the past decade have drawn public concern from elected officials, but the fiduciary standard for stockbrokers hasn’t budged.


The biggest criticism of the traditional brokerage relationship is that individual investors, regardless of their wealth and presumed sophistication, may not realize when their broker is acting as an adviser or just as a service provider. “I strongly support a fiduciary standard for brokers that are offering individual investment advice,” says Michael Barr, a professor of law and public policy at the University of Michigan. “It doesn’t make any sense to have an individual try to distinguish between different categories of financial professionals.” Existing legislation has already laid out a clear path to greater accountability for brokers, according to Barr, a former assistant Treasury secretary under President Barack Obama and a key architect of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Surprisingly, former insiders are some of the loudest voices calling for an overhaul of the brokerage world. “Over the years the title on the business cards changed from ‘stockbroker’ to ‘account executive’ to ‘investment adviser,’ but those changes were largely cosmetic,” says Lee Feinberg, who for 21 years managed business units — including equity and syndicate sales, marketing and trading, and corporate employee financial services — in the private client group at U.S. brokerage PaineWebber Group and its successor firm, Swiss bank UBS. The growing complexity of financial markets created an urgency for a broker job description better aligned with client needs, the retired banker contends. “When I started in the business in 1973, there were not as many investment products,” Feinberg says. “I provided advice and executed orders while keeping my clients’ interests at heart.”

The introduction of proprietary alternative investments and structured products, among other offerings, heightened potential conflicts of interest, Feinberg notes. He thinks shaking up the standards could be positive for brokers as high-net-worth clients become increasingly sophisticated and demand more accountability: “In today’s world wealth management has become an asset management business, a service business, and the industry standards should reflect that.”

Still, any shake-up hinges on politics, with lobbyists for the brokerage industry seeking to soften the blow. “I am not optimistic,” law professor Barr says.