There is a raging debate inside the investment industry between the fiduciary standard and the suitability standard.  Under a fiduciary standard, an investment advisor must always act in the best interest of the client and must always disclose any potential conflicts of interest beforehand.  Under a suitability standard, an investment advisor must not make any recommendations that are not suitable for clients.  The classic example of a “suitable” recommendation is, when a client needs a large-cap growth mutual fund, can the investment advisor recommend any large-cap growth mutual fund?  And, does the advisor have to inform the client that the mutual fund company will send the advisor and his wife to Hawaii for a week if clients put their money into that mutual fund?

Investors prefer a fiduciary standard overwhelmingly.  They don’t want their advisors getting secret compensation.  They want to sleep at night with the knowledge that someone is at least trying to take care of their assets.

Brokerage firms have steadfastly opposed the fiduciary standard, and here’s why:  It is much more difficult to act as a fiduciary and much easier to get sued.  Stockbrokers are commissioned salesmen, while the fiduciary liability would be on the brokerage firm, not the brokers.  How would a brokerage firm manage every action by every commissioned salesman?  They argue their increased compliance costs and sales expenses would prevent them from serving the vast majority of Americans.

Last week, the Department of Labor announced they would need yet another year to define fiduciary standard, while the Securities & Exchange Commission needs another year to do a cost-benefit analysis.  The brokerage industry has done a great job of slowing down something badly wanted by clients.  It is an age-old legislative game to delay and delay until the other side gets tired.

In the meantime, many investment advisors have chosen to become Registered Investment Advisors (RIA), gladly accepting the heavy fiduciary responsibility . . . simply because it is the right thing to do!