New Rules for Brokers May Help Investors

Expect Congress to up the ante for brokers. Among the hundreds of provisions in the massive financial regulatory legislation moving through the Senate is a requirement that brokers be held to the same standards as investment advisers in how they treat clients.

Traditional investment advisers are required to act in their clients’ best interests, while brokers are required only to steer clients into investments that are “suitable.” Lawmakers and regulators say sometimes those investments may be lucrative for the brokers at the client’s expense. “If someone is acting like an investment adviser, they should be subject to regulations,” says David Tittsworth, executive director of the Investment Adviser Association. “If you give all of your life earnings to someone, it matters whether they have a higher standard of care.”

Brokers make trades for clients and are paid per transaction. Investment advisers give clients specialized advice and therefore are subject to a stricter rule. But a 2008 RAND study shows that both pay structures and services for the two groups look increasingly similar. In addition, customers often find differences confusing and don’t know that they are subject to different laws.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

“If you look at commercials for brokers, they are selling trust and confidence,” says Bob Webster, director of communications at the North American Securities Administrators Association. “But people need to know when they are getting advice, whether it’s in their best interest.”

For investors, the change will have pluses and minuses. Harmonizing the standards will boost disclosure and transparency and make it easier for investors to shop around for advice and avoid brokerage house scams. But higher fees will likely be part of the bargain. Brokers say that the new requirements, which will force them to publicize disciplinary history and conflicts of interest, will be costly to implement.

Congress is still ironing out whether it will force the issue or direct the Securities and Exchange Commission (SEC) to handle it, but the fury over Goldman Sachs’ failure to disclose conflicts of interest around a particular security has given the issue momentum in Congress. Even if lawmakers don’t pass a direct change, the SEC will eventually approve higher standards. The agency has long wanted to get tough on brokers and will soon have the authority. “The financial crisis and the shenanigans that have gone on helped focus this issue and call attention for the need for more clarity,” says Webster.