Brokers Should be Legally Liable to Act in the Best Interest of Their Customers

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 – a place where people can invest in stocks and bonds simply. Check out more of what Jon has to say at the Betterment Blog.

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Published or updated August 24, 2011.


  1. Silly.
    Should McDonald’s be legally liable for customers getting fat? Should casinos be legally liable for gamblers losing all their money? Should…

    This is an ad for

    • Umm, yeah, McD’s should be if they aren’t disclosing the ingredients they have in the food as well as the nutritional value.

      Maybe casinos should display what the odds of each game are in the casino. This way those who go to the casino can make a better judgment on whether they should play a particular game. Though I suspect many people expect a casino to come out ahead most times, I don’t that the expectation is the same for a broker.

      Why is it a bad idea for a broker to be responsible for what they sell? I would think many people use a broker thinking their are getting the best advice for their situation when in reality they are getting the best advice for the broker’s situation. Of course there’s always risk. But a person should have more t fall back on than “I told you this could lose money” while the broker makes him firm happy by shoveling off bad investments.

  2. Let the buyer beware! I don’t disagree with your points, but recognize you are dealing with a sales person. If I am investing $5,000 I should do a little due diligence too. I believe in personal responsibility.

    • Yes, I believe in personal responsibility too. But shouldn’t a broker have some responsibility to the customer and not just to himself and his firm?

      If customers had the same access to information that brokers had then at least it’s a level playing field, but I think many times that’s not the case.

      That said, there are times when investors don’t want to know what’s going on in their investments and I think that’s a mistake too.

  3. I’m going to have to side with kraftcents with this one. It’s up to the customer to take upon risk for his or her financial advisor. Personal responsibility is key for situations like this. Take smoking for example. Yes cigarettes kill, but should there be higher taxes and restrictions on them, absolutely not. I don’t smoke, just a good example. It’s up to the investor to research advisors, NO EXCUSES!

    • Jon Stein, CEO of and author of this article here. We’re offering people a better way to invest. Jon Saver, Krantcents, Dan, you all believe in the importance of personal responsibility. I do, too. People should look out for themselves.

      But, do we want to make life more difficult for people than it already is? We agree that cigarettes kill, so I think that means we should help each other out by making them less accessible. Why not make people less likely to get hooked by limiting their advertising? To look at it another way, if we think cigarettes and their advertising should be unregulated, why should any dangerous drugs be regulated? Why have the FDA?

      People should take personal responsibility for all of their decisions. It’s my view that we should hold people accountable, and also make life easier and more efficient when we have opportunities to do so. I believe that holding brokers accountable for their actions and recommendations is similarly just, and increases the efficiency of the marketplace. The brokers disagree, in large part because they also know this to be true, and they profit off of inefficiency.

  4. I agree whole heartedly with Glen.

    The realm of investment advice is a highly specialized area in which some advisors take years to complete the education and experience requirement for a single designation (i.e. CERTIFIED FINANCIAL PLANNER).

    It is not the same as a basic understanding of how much cholesterol is in a Big Mac or whether gambling on a roulette wheel is a good idea. It goes much deeper.

    An investment advisor should carry a fiduciary responsibility to act in the best interest of a client in the same way that a medical doctor should be expected to also act in the best interest of the patient, not the pharmaceutical company.

    Make sure that any advisor that you hire has more than a series 6 license. They should be a Registered Investment Advisor (series 66) with their state and ideally carry a Certified Financial Planning designation.

    I don’t think the issue is whether or not retail investors have the responsibility to do their due diligence with the investment advisor and strategies he recommends…I think the point of the article is that advisors have a fiduciary responsibility to act in the best interest of their clients.

    Derrik Hubbard, CFP

  5. If the broker acts as the person who takes my phone call and buys/sells as I direct, he shouldn’t be a fiduciary. If they give advice in any way, shape, or form they should absolutely be considered fiduciaries.

What Do You Think?