Why All the Fuss About a Fiduciary Standard for Stockbrokers?

Why All the Fuss About a Fiduciary Standard for Stockbrokers?

Many investors mistakenly believe that stockbrokers must act in the best interests of investors. Contrary to the general public’s misconception, brokers generally are not held to such a fiduciary standard. The lack of a broad fiduciary standard subjects investors to investment fraud and stockbroker negligence on a regular basis.

Brokers need only demonstrate that recommended investments are “suitable.” And suitability merely means that the risks and nature of the investment are appropriate based on the investor ’s risk tolerance, investment objectives, income, net worth, and other similar factors. That is, while a broker should not recommend a highly risky and illiquid hedge fund to a low-net-worth retiree living on a fixed income, the broker generally would be permitted to recommend their own firm’s high-cost investment fund when a similar (but lower cost) investment fund also is available. Such a low standard does not provide investors with adequate protections from unscrupulous brokers.

Under a fiduciary standard that the SEC and the Department of Labor are considering, brokers would be held to a higher standard. The proposed rule would require brokers to explain available options to an investor and to disclose cost structures and the existence of less expensive alternatives. Brokers also would be required to disclose and all conflicts of interest. Many investors are shocked to learn that such a standard does not already exist. Unfortunately for unsuspecting investors, under the current rules, stockbrokers, brokerage firms, and banks generally are permitted to (and willing to) place their own interests ahead of those of investors by selling their own higher fee products rather than similar, but less expensive, products.

One would think that a fiduciary standard makes sense and would be fair to investors. But Wall Street has been aggressively fighting against the imposition of such a standard. That should tell you something. Wall Street banks do not want to forgo the profits that they make at the expense of investors.

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The attorneys at Dimond Kaplan & Rothstein, P.A. have prevailed and recovered against numerous brokerage firms for their wrongful actions as well as the actions of the brokers. If you have suffered investment losses of any type, contact us to schedule an appointment or consultation today.

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