Stockbrokers—Three Steps to Build Trust

Congress and the usual suspects, according to The New York Times, are debating legislation that requires stockbrokers to act in their customers’ best interests. Excuse me? These laws don’t exist?

At issue are legal standards: “fiduciary” versus “suitable.” The higher standard, fiduciary, requires investment professionals to put their clients first. It’s the “I’ll take a bullet for you” approach to financial advice.

Suitability is more subjective. When I was a stockbroker, this standard required me to answer one question on behalf of my clients: Is the investment right for them? Suitability, as you might guess, is subject to interpretation.

The regulators, it seems, are jumping on the fiduciary-standard bandwagon. No offense, fellows. But it’s like telling stockbrokers, “Behave, boys and girls.” To the rank and file, advisers in the trenches, these guidelines are written in a foreign language: legalese.

I need to be fair. The debate addresses tangible issues like fees and uneven regulatory standards. But let’s not waste all the hard work. Legislation that distinguishes between “fiduciary” and “suitable” is oblique to people in the trenches. I know. I was there.

If we want to trust our stockbrokers or financial advisers—I don’t care what you call them—why not address the issues head on? Leave jargon to the lawyers. And talk to finance people in their own language. Here’s what I recommend:

Fees and/or commissions. Put a hard cap on them, something high, but a cap nonetheless. Every investment I ever saw as a stockbroker, with a fee or commission over 2 percent, was toxic. Hard caps are dangerous, but if we use standards like “fiduciary” and “suitable,” the industry will hide behind the legal complexity. Numbers don’t equivocate, right?
Uneven regulation. Here’s what I don’t understand. For years, I worked for brokerage firms on Wall Street. I was subject to licensing and ongoing education. You could do a background check on me by going to FINRA’s website. Then, I joined a Registered Investment Adviser (“RIA”) and became a “fiduciary,” I think. I did the same job, but my licenses were no longer necessary. I disappeared on FINRA’s website, because the SEC monitors RIAs. But the SEC only provides information on companies, not individuals. It became more difficult to check me out because FINRA dropped my information two years later. What’s with that?
Profit Centers. Okay, here’s where I get myself into trouble. It’s time to streamline all those profit centers at big brokerage firms, because clients get treated like turkeys at Thanksgiving. Everybody wants a cut of something. Only the “something” isn’t dressing or drumsticks, white meat or dark. It’s fees. Too many profit centers mean too many chances to jerk clients around.

“My job is to bring you the best of Wall Street, and to protect you from it at the same time.” That’s what I told my clients, because brokers can’t always trust their own firms. The fixed income people, for example, maximize profits at the expense of retail clients. So do guys in equities, guys in options, and so on. See what I mean? Everybody wants a slice.