The Broker Oath - But Will It Work?

The standards become a real issue when brokers are confronted with a range of products that may or may not be appropriate for their client, but which offer a range of compensation levels to the broker.

The Department of Labor's efforts over the past couple years to enact new regulations forcing financial advisors to adhere to strict fiduciary duty when it comes to recommending products and strategies to their clients have been killed off by the Fifth Circuit. It appears that brokers will, once again, get off the hook when it comes putting their clients' interests in front of their own. Into the breach has stepped an idea that has been kicking around for a years now, but which may be the best of several uninspiring options to compel brokers to act more responsibly toward investors: The Oath.

The Broker Oath of Fiduciary Duty

Created by the Committee for the Fiduciary Standard, the oath is a simple, one-page document outlining the principles of fiduciary duty. Brokers would be ask to sign this document in the presence of clients and to adhere to its principles strictly - even when industry regulations hold them to the lower standard of suitability. Here are the 5 principles at the core of the broker oath: 

  1. I will always put your best interests first.

  2. I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
  3. I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.
  4. I will avoid conflicts of interest.
  5. I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

The Difference Between the Fiduciary Standard and the Suitability Standard

At the heart of the debate over which standard financial advisors must uphold is the issue of personal interest. Investment advisors, unlike brokers, are under a legal obligation to adhere to a strict fiduciary standard, which means that they must always act in the best interest of their clients, even when it means sacrificing their own gain in the process. Brokers, on the other hand, are customarily expected to act in their clients' best interest, BUT, they do not have to do so. They are under no legal obligation to put their clients' interests ahead of their own - and guess what - they often don't. This becomes a real issue when brokers are confronted with a range of products that may or may not be appropriate for their client, but which offer a range of compensation levels to the broker. Which level do you think the broker will choose, all other things being equal? The highest level of compensation of course!

Now, brokers cannot JUST choose products or strategies on the basis of compensation. That is where the suitability standard comes in. Suitability is a concept which requires the product and the strategy to match the investor's profile and objectives. While important, it is considered much less strict than the fiduciary standard. Indeed, it is in the gray area where suitability does not quite reach fiduciary duty that brokers get themselves into a lot of trouble - and lose their clients' a lot of money.

Oaths Are Good; Regulations Are Better

While we would be happy to see brokers taking their fiduciary duty to investors more seriously by committing to the oath, we feel this is a weak solution to a billion-dollar problem within the securities industry. Not only that, but brokers and pro-industry attorneys have already poked holes in the oath, saying the oath should not pre-empt regulation and that it is disadvantageous to brokers, etc. If brokers cannot even willingly assume responsibility for upholding fiduciary duty because their own moral conscience compels them to do so, we know there is a big issue here. An issue that will only be solved by clear and comprehensive regulation that imposes fiduciary standards on ALL members of the finance community who handle other people's money.

PA & NJ Securities Law Firm

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If you or someone you know has been the victim of broker misconduct or investment fraud, please contact our securities attorneys immediately for a free consultation toll-free at 215 462 3330 or by using our online contact form.

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