The Flinchum File

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Change is coming…….


It was obvious last September when the markets crashed, following the Lehman failure. It became certain last December with the arrest of Madoff. There will be a re-regulation of the securities markets, which is desperately needed. Of course, “the devil is always in the details”!

Last week, the Obama Administration introduced their plan for re-regulation. It is large, complex, and far-reaching but certainly unlikely to be implemented as presented. The most interesting part to me is whether financial advisors should be held to a suitability standard or to a fiduciary standard. It is an important difference and could re-shape the industry. A stockbroker is currently held to a suitability standard, which only requires the advisor to present investment choices that are “suitable” for the client. On the other hand, financial advisors who are Registered Investment Advisors are required to act in the client’s best interest, not the advisor’s best interest, nor the firm’s best interest. Currently, neither the stockbroker nor the firm must act in the client’s best interest. The new chairman of the SEC recently advocated that all advisors be held to a fiduciary standard, which means every stockbroker of every firm will be incurring fiduciary liability for the firm. That is an enormous unseen and unknowable contingent liability to every firm. They may well sell pieces of their retail business to brokers and spin them off into separate legal entities.

Regardless, I don’t plan to own any shares in brokerage firms until this is made more clear. It is a BIG change!

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