A little while back the S.E.C. recommended that stock brokers be required to act as fiduciaries. This would mean they would have to act in the best interest of their customers. The New York Times reviewed the salient issues on their Bucks Blog.
We think this is a no-brainer: OF COURSE brokers should act in the best interest of their customers – and they should be legally liable if they do not.
Predictably, brokers are against this common-sense approach. In large part, this is because it would cut into their profits. As the NYT explains:
… Stock brokers, many of whom call themselves advisers, are required only to recommend investments that are suitable. That means they can potentially sell you a product that is more lucrative for them when a better option is available. And that’s perfectly fine in the eyes of the law.
Seem strange? It is. It’s an artifact of the way markets were set up – brokers used to do real work of finding buyers and sellers. Now they mostly behave like investment advisors – helping people invest – but they’re not held to the same high standards. That’s not to say that they’re all crooks – there are many good brokers out there – but why not hold them to an identical standard as their advisor kin, if they’re allowed to provide the same sort of recommendations?
It should be noted that Betterment, which is an investment advisor, already has – and is proud to have – a fiduciary responsibility to its customers.
Part of what went wrong in the financial collapse of 2008 was that broker were selling garbage securities to customers, knowing that it was garbage. In fact, if brokers had to look out for their customers interests – margins, spreads, and commissions might come way down – and many brokers might be out of business, perhaps replaced by more efficient electronic exchanges, and more efficient allocation vehicles – like Betterment.
And that might be a good thing for all of us.
Jon Stein is the CEO of Betterment.com – a place where people can invest in stocks and bonds simply. Check out more of what Jon has to say at the Betterment Blog.