Moving the Standards

Sent: Friday, September 11, 2009 5:26 PM
Subject: Global Market Update 9-14-09

Are your investments suitable? Or ideal?
That’s the question being asked these days in Congress. Because in the shake-up of financial regulations, Congress is reviewing how investors get advice.
Most stockbrokers are governed by a suitability standard. This requires that brokers offer advice that is appropriate for investors considering their situation. But if the broker knows of a similar investment that generates less income for him, he’s under no obligation to offer it. He just has to make sure that what he sells isn’t fraudulent and fits the buyer’s circumstances. In other words, let the buyer beware.
By contrast, fiduciaries are held to a different standard. They have to render advice as if they were the client. That means if they’re working with a mutual fund company and they find out that a similar one is available that costs less, they have to offer the cheaper one. Fiduciaries are required to put themselves in the client’s shoes.
Full disclosure here: I’m a fiduciary, and I work for a fiduciary firm. I think the world would be a better place if everybody acted like one. But I can see problems if Congress abolishes the suitability standard and replaces it with a fiduciary standard. For one thing, lawsuits would multiply like rabbits. But I also see the need to have a diverse way for people to get their investment advice. Competition usually leads to better results.
Appropriate investments are good. Ideal investments may be better. But its best when everyone has to compete.

Douglas Tengdin, CFA
Charter Trust Company

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