Recent events have led me to conclude that, at least in some ways, the U.K. is ahead of the United States when it comes to investing. The first—and by far the most important—reason I have for drawing such a conclusion is that in January 2013, all licensed financial advisors in the U.K.were required to become fiduciaries and adopt a fee-for-service compensation model.
Transitioning to a fiduciary-only standard means that, in the U.K., selling a product and getting a commission on the transaction is no longer permitted. (In July 2013, the same also became true for advisors in Australia.)
There’s simply no reason for advisors in the United States not to be required to adopt a fiduciary standard of care as well, despite all the protestations from Wall Street. I can’t believe any investor who truly understood the legal difference between the fiduciary standard and the suitability standard would knowingly choose to work with someone who isn’t required to provide advice that is solely in the client’s interests.
There is no more logic to working with a professional who won’t offer that standard of care than there is to visiting a doctor who won’t accept the Hippocratic Oath, which requires physicians to first do no harm but also to act in the best interests of their patients.
What About Smaller Investors?
An often-heard argument from Wall Street is that investors with smaller accounts will lose access to affordable advice if commissions are barred as part of an industrywide conversion to the fiduciary standard. That argument holds no more water than the proverbial sieve. Anyone making that statement is likely obfuscating to protect their own interests.
First, a commission can easily be converted into a transparently constructed fee of the same dollar amount. The difference is that the commission is tied to the sale of a product, which might not be in the investor’s best interest. On the other hand, once a fee is paid, that fee is for advice only.
As a result, there’s no longer any incentive to recommend a product unless it’s in the investor’s best interest. That blows the securities industry’s entire argument out of the water. Of course, a fee would be more visible. And clients would have to write a check to specifically pay the fee. That’s why broker-dealers don’t like this idea.
The bottom line is that Wall Street’s opposition to the fiduciary standard doesn’t come from concern over an increase of risk and liability. They just don’t want the obligation of doing what’s best for the client instead of what’s best for them. That’s the real reason behind why the brokerage industry has gone to such great lengths to blur the line and maintain confusion and ignorance among investors. It’s the only way they can keep investors open to accepting advice that isn’t guaranteed to be in their best interest.