Tuesday, August 20, 2013

Do Stock Brokers Work For Their Clients?

They might soon. The WSJ reports that U.S. Department of Labor is expected to propose new rules that would ensure that brokers and other securities professionals would act solely for the benefit of their clients when advising on individual retirement accounts. Currently, they have no fiduciary responsibility to their clients. Since they typically earn fees in proportion to the transactions their clients make, they have perverse incentives for more transactions even if these are not in the clients' best interest. A fiduciary responsibility would help alleviate this but may have other consequences.

The brokerage industry is concerned that they will not be able to earn enough under the proposed rule. As the consistently cogent reporting of Megan McArdle points out, this may be the best evidence for the change in the rules.
On the other hand, when I hear that brokers won’t be able to service small clients any more, my basic reaction is "Good." Essentially, brokers are arguing that they can’t afford to give you honest advice; their livelihood depends on being able to steer you into investment vehicles that pay them kickbacks. Sorry, commissions and referral fees. And where do the fees come from? Why, your pocket, ultimately; there’s a reason your broker has to be paid to tell you that this is a good idea. This sort of free advice you can’t afford.


  1. So if the relationship becomes fiduciary, does that necessitate brokers being officially regulated like doctors and lawyers by something like a state board? Ex: They must be licensed (specific education and experience), be subject to audit and could be sued for "malpractice"?

  2. probably. Self regulation is what they currently have.