Supported by a survey of Massachusetts advisers, the Massachusetts Secretary of the Commonwealth, Francis Galvin, urged the SEC to apply the current fiduciary standard to brokers.  Responding to the SEC’s request for information, Mr. Galvin argues that the suitability standard hurts retail investors and serves to protect brokers.  Mr. Galvin asserts that retail investors are generally unsophisticated and rely on their brokers’ advice.  However, the suitability standard allows brokers to claim that they were “mere merchants” who sold a product to a buyer who signed a document disclosing all the risks.  Overwhelmingly, the advisers surveyed supported maintaining the current fiduciary standard applicable to advisers and applying it to brokers.

OUR TAKE: We do not make the prejudiced leap that advisers are more honest than brokers or that the fiduciary standard makes them that way.  We think the problems arise from the incentive structure.  Fee-based advisers get paid regardless of the products they recommend.  Brokers only get paid if they sell something, and riskier products often mean higher commissions.  Maybe, the regulators should consider addressing commission-based fee structures, rather than the legal standard or disclosures, when regulating retail advice.