Here’s a change for the better

The WSJ reports that one of the changes Obama is seeking to impose on Wall Street is increasing the standard of care stock brokers owe their customers from the “suitability” standard to a “fiduciary” one. Right now, a broker’s only obligation when giving you investment advice is to refrain from making recommendations unsuitable for you given your age, income, net worth and financial sophistication. In practice, that means  brokers can sell you anything they like because, in Wall Street’s morality, if you were smart enough to accumulate something worth stealing, you’re financially sophisticated enough to have realized that your broker was pitching dog doo.

A fiduciary or trustee relationship would require the broker to only consider your best interests and bar him (or her – some of the worst crooks I hunted in the canyons were woman – ask me about Linda Schwartz some day) from pitching the latest Merrill Lynch -“Guaranteed to lose but it sure pays huge commissions” fund.

This change would have a huge effect on brokers’ earnings and liability so naturally, the firms are fighting back. It seems likely that Obama will lose this fight or the bill will be so watered down as to be worthless, but I give him credit for trying.

3 Comments

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3 responses to “Here’s a change for the better

  1. Anonymous

    Since you invited me to ask, Chris, I’ll do so right now: who is Linda Schwartz and how was she one “of the worst crooks I hunted in the canyons”?

  2. Anonymous

    I sense a juicy story here.

    Please tell.

  3. Old School Grump

    If there’s anything I learned the hard way in the past year and a half, it’s to be profoundly suspicious of all “investment products” other than plain old stocks, plain old bonds and no-load mutual funds run by people in the business for at least 25 years.

    Seems to me that Wall Street’s mantra through this recent time period has been (to state it politely) “Well, gosh, it worked great, until it didn’t.”

    For us hapless individual investors, this took the form of … Auction Rate Securities (ya mean they’re not really as safe as a money market fund, but with a better return?) … target-date funds for college savings accounts and retirement accounts (hey, guys, let’s underperform the stock market on the way up, and market perform the stock market on the way down! Hooray!) … and solemnly presented models for asset allocation (I swear there’s a reason why “asset allocation” rhymes perfectly with “mental masturbation”).

    I think most stock brokers are honest and genuinely want their clients to do well (even beyond the consideration that that’s the best way to get repeat business). However, most of all, above all, they want to make a good living, and that means they need a reason to call you with something to sell you. Sometimes what they sell appeals to your desire to be among the hot-shots (see Noel, Walter, and other hedge fund pimps); sometimes they work the other end of the persuasion spectrum, appealing to your common sense (see target-date funds). But, always, without being nasty about it, you should be suspicious. Nobody cares about your money as much as you do, regardless of whatever “fiduciary duties” are laid upon them in FedRegulationLand.