Should Stockbrokers Be Held to the Same Ethical Standards as Financial Advisors?

There is one compelling reason why stockbrokers should be held to the higher ethical standards as financial advisors. Right now stockbrokers are held to a vague ethical standard called “suitability”. They are supposed to make suitable recommendations based on the knowledge of the client. However, what is suitable for one client may be unsuitable for another client with the same characteristics.

Financial advisors are also required to make suitable recommendations. However, financial advisors are held to an additional ethical standard, the highest standard in the financial services industry, that requires them to always put investor interests (achieve financial goals) ahead of their interests (make money). This standard for financial advisors provides a lot more protection for investors and a lot more liability for financial advisors and the firms that hold their registrations.

So what is the one compelling reason? It is based on a regulation that confuses investors and makes deceptive sales practices legal. Stockbrokers are allowed to make “sales recommendations” when they sell investment products. Financial advisors are allowed to provide ongoing “investment advice” when they sell investment services. You tell me the difference between “recommendation” and “advice”. There is none. This is the compelling reason why stockbrokers and financial advisors should be held to the same ethical standards.

The next most compelling reason is the key regulators (SEC, FINRA) have no control over what stockbrokers say to investors. For example, they “say” they are financial advisors because it reduces sales resistance and helps them sell investment products. No regulator can control what brokers say to investors. And, investors have no proof of what was said because the information is verbal. This is the second compelling reason why stockbrokers should be held to the same ethical standards as financial advisors. The need for documentation goes away if they are held to the same standard.

However, Dan Kadlec got it right when he said “Don’t hold your breath” . Wall Street is fighting fiduciary standards for stockbrokers because it does not want to be held to an ethical standard that requires stockbrokers to do what is best for investors. Wall Street maximizes revenue, profit, executive bonuses, and share prices by doing what is best for Wall Street.

Wall Street is a major special interest that spends hundreds of millions of dollars per year on lobbyists who protect its interests. Two of the hottest issues are fiduciary standards for brokers and mandatory disclosure requirements for anyone who sells financial products or services. Wall Street lobbyists control enough votes to make sure neither regulation passes or they are so watered-down by loopholes that they have no impact.

Other posts from Jack Waymire