The Absurdity of Making Brokers Into Fiduciaries
- Posted by Leigh Drogen
- on February 2nd, 2011
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. I want to thank John Benedict of J2 Capital Management for constantly keeping everyone updated on these developments.
FINRA is trying to force registered reps into some type of fiduciary responsibility. But when we take a look at exactly what a broker is, any one of us who is sane would ask, why in the hell should they be fiduciaries? Exactly how far that responsibility will go is yet to be seen, but any type of responsibility raises huge questions.
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. The job of a broker is to choose investments suitable for a client based on their risk tolerance, other security holdings, financial situation, including income and net worth, financial needs and investment objectives. That’s it. Nowhere does it say that the broker must act in the best interest of the client. And there’s a great reason for that.
As I said, it is not the broker’s job to make money for the client, his job is to give the client information on the asset and allow the client to make the decision. In my mind the suitability stuff shouldn’t even exist, brokers should be able to sell anything to anyone, because all they are is salesman. If you think your broker is anything but a salesman, think again. 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.
Look I’ve got no horse in this game, I’m not a broker, I never want to be a broker. But for these guys it would be a death sentence. How many of these salesman do you think could actually handle that responsibility?
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 with the CDO market. Goldman Sachs didn’t care if it’s clients were buying a “a shitty deal”, they were there to sell the paper to a firm that was suitable. It wasn’t their job to make a judgement on the possibility for appreciation or depreciation of the asset in the future.
People who didn’t understand the rules got pissed, and now FINRA is trying to cover its ass for the next time. But how is the broker supposed to sell paper to a client under a new fiduciary rule? The brokers job is to sell, not to pick good investments. Is FINRA just trying to do away with the whole brokerage industry?
I guess that wouldn’t be all that bad on the retail side, in fact I think it would be a good thing. 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. I can say that amongst the brokers who do know how to trade and invest there is a mass defect going on right now to the investment management side. This is mostly due to technological advances that allow individuals, like myself, to manage assets without being part of a larger firm.
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 makes sense is to only allow them to sell to institutions, no retail clients. Just my view.
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Leigh Drogen is the founder and chief investment officer of Surfview Capital, LLC, a New York based investment management firm employing an intermediate term long/short momentum strategy. More »
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