Brokers as Fiduciaries

A controversial concept

In 2009, The White House proposed fiduciary status for broker-dealers and their registered representatives. Legislation was sent to Congress where the leaders endorsed the concept. The 2010 Dodd-Frank bill includes a section titled “authority to establish a fiduciary duty for brokers and dealers.” It grants the SEC authority to create a standard of conduct for broker-dealers ‘when providing personalized investment advice about securities to retail customers and to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.’


The majority of investors have no idea what their relationships is with their brokers. I get it. When I was a teenager I remember looking up to my dad’s broker as someone who knew all there was to know about stocks. How naive.

“Three out of four U.S. investors mistakenly think that financial advisers at brokerage firms are required to put clients’ interests first, said a survey by several consumer and financial planning organizations.”

“Seventy-six percent of investors said financial advisers, a term used by major brokerage firms to describe their salespeople, must uphold a fiduciary duty to their customers, according to the survey”

The quotes above come from From the Sep 15, 2010 edition of (Bloomberg/Newsweek)


When I first heard about the idea of forcing brokers to perform as fiduciaries, I was convinced that it made a lot of sense. That way, the brokers would no longer be allowed to peddle whatever garbage their firms were trying to unload onto individual investors.

I eventually came to understand that stockbrokers were not very well informed, knew little about the stock market and were truly glorified salespeople. Consumers often make the mistake of asking sales people for advice when the truth is that the customer is often far more knowledgeable than the person making the sale.


Summing the discussion brilliantly is Leigh Drogen. The version below is condensed.

The Absurdity of Making Brokers Into Fiduciaries

By Leigh Drogen (

There have been rumblings around town about the financial regulatory authorities wanting to make registered representatives (brokers) into fiduciaries. I can’t express just how terrible an idea this is, it just baffles me.

The job of a broker is to sell product, that’s it. Somewhere along the way the public came to think that the broker’s job was to make them money. No, it never was. Nowhere does it say that the broker must act in the best interest of the client. And there’s a great reason for that.

The broker’s job is to give the client information on the asset and allow the client to make the decision. In my mind brokers should be able to sell anything to anyone, because all they are is salesman. His job is to collect a commission. Now, if he gets you to stick around, trade more, and spend more on commissions by picking the right stocks at the right times, good for him. But to say that is his job, to say he should be held liable for acting in your interest, would be asinine.

The financial meltdown and subsequent equity meltdown of ’08 uncovered just how bad some of these brokers were at trading and investing. And we all saw what took place on the institutional side. Goldman Sachs was there to sell the paper. It wasn’t their job to make a judgment on the asset.

Retail investors should not be trading anyway, they should be giving their money to investment managers to invest. Why? Because investment managers have a fiduciary responsibility. If they lose your money picking stupid investments you can sue them. They have to pick a strategy and stick to it, if they don’t, you can sue them.

That opens up another problem. Are all of these brokers going to become investment managers? I hope not, 98% of them don’t know how to do anything but sell, why would they.

At the end of the day though I think the rule would be ridiculous, in essence making everyone an investment manager. Wall Street needs brokers, but what would make sense is to only allow them to sell to institutions, no retail clients. Just my view.


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