Brokers as Fiduciary: A Middle Ground

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Brokers as Fiduciary: A Middle Ground

From a reader:

As a reader of yours, I find your views always interesting and well thought-out, even when I disagree. Thank you for sharing your thoughts, wisdom, and experience, as I truly believe you raise up the areas of thought you touch.

I have a question that I hope you will address on your blog, though the urgency is low. As a CFA and CFP working in a small RIA, I have been paying close attention to the debate about imposing a uniform fiduciary standard onto RIAs and brokers. I would loved to hear your thoughts about this topic, maybe addressing the following:

  • Should brokers giving advice be held to the high fiduciary standard of advisers?
  • Could a two-tier fiduciary standard work (i.e. codification of the Merrill rule)?
  • The primary broker argument against the fiduciary standard, as I hear it, is that it would make services to retirement accounts unprofitable. Do you agree?

I hope to hear your thoughts on this published on your blog because I know that quite a few people with second or third degree connections (maybe first, but I don’t know) to the policy makers and lobbyists read your blog.

First, thanks — I know my reader base stretches into some lofty places, not that I deserve it.

There should be informed choice when choosing those that advise investors.  I don’t think that brokers should be held to a fiduciary standard, but I do think they should have to state to clients that they have a potential “conflict of interests.”  Clients don’t make money when trades occur, but brokers do.

The trouble is, retail investors are the dumb money.  There is a tension between allowing freedom and letting people get shorn by those that are more skilled.  Some financial products are sold not bought, and it is largely because people will not plan in advance for themselves.  We see that in life insurance all the time.

Here’s the other side of it: we can’t make retail investors smart.  In most transactions of life, the foolish get hosed.  We can’t protect people from being dumb.  If we did that consistently, our economy would probably fail.

The idea of “just prices” does not work.  It’s not flexible enough.  In the end, things work best when we let let markets work, but require extensive disclosure that most will understand, and some won’t.

Perfection is not possible in law or regulation.  If we get “pretty good” we have hit the top.  Enjoy pretty good where it exists, though I would encourage investors to use those that have to put your interests ahead of all else.

PS — there has to be a way to service retirement accounts — as with insurance contracts, some sort of AUM fee or trailer commission would do it, but not something based off of transactions…

By David Merkel, CFA of Aleph Blog

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About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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