Broken Brokerages: Finance Luminaries Join Fight Over Uniform Fiduciary Standard

Which isn’t to say, supporters of the fiduciary standard would add, that brokers are bad actors by definition, but that the current regulatory regime creates situations in which the broker’s best interest may come in conflict with his client’s. SIFMA’s Mr. Hammerman didn’t dispute the point. “The broker-dealer model has many conflicts of interest,” he said. “If you’re a broker and you wanted a municipal bond portfolio, the best pricing might be trading with me because I have the best inventory for those bonds … And you say, ‘Fine, I’ll take it.’ I’m selling from my inventory a bond, and you’re buying it. We’re on different sides. There’s nothing wrong with that if you’re trading with me and I’ve given you disclosure. Or you might be more comfortable buying from a third party. The pricing might not be as favorable, but we can do that.”

That sounds a little like trusting Wall Street to deal fairly with less sophisticated investors—a notion with a history of, uh, mixed results—but Mr. Rostad said his group wasn’t trying to squelch all conflicts. “Commissions are a conflict, but they can be managed. In and of itself, proprietary products are not a conflict with the uniform standard.” The sticking point? “The issue with any conflict is, can you mitigate or manage the conflict so that you proceed in the client’s best interest?” he said.

Traditionally, broker-dealers have relied on written disclosures to mitigate potential pitfalls conflicts of interest. But disclosure is often insufficient protection: For one thing, how many investors read, let alone understand, the fine print at the back of a mutual fund prospectus? For another, academic research on the subject has shown that disclosure can create a false sense of safety with regard to conflict of interest.

Daniel Kahneman’s classic study on anchoring may indicate that once an investor has chosen to trust an adviser, a disclosure of conflict of interest is unlikely to shake the decision. The version of the uniform standard that Mr. Rostad is promoting calls for the disclosure of material facts. But a fiduciary rule that requires advisers to act in clients’ best interests would rely less on disclosure.“The bottom line of the research that we see is that even short, clear concise disclosure fails … in the sense that investors don’t believe it,” he said.

That’s one bottom line, anyway. Another is that a uniform standard is unlikely to be written anytime soon. Regardless of who wins the presidential election, meanwhile, it’s frequently speculated that Ms. Schapiro will leave the agency, making it anyone’s guess how rule-making will proceed under new leadership.

Perhaps because the battle is stalled, the crusaders for the fiduciary standard tend to take a philosophical tack. Mr. Malkiel told The Observer that he signed the declaration because he believes in the possibility of a “better world.” Andrew Golden, chief investment officer for Princeton University’s endowment, signed because the battle over the fiduciary standard is “about society, about protecting my mother and her personal account, about protecting my friends and my kids.”

“As the brokers themselves realize that they’ve signed onto something that calls for a standard of behavior, that they’re operating in companies that have signed on or been forced to sign on to that standard, it changes the appetite for the creation of certain securities and certain investments,” Mr. Golden said.

Mr. Rostad put it more grandly. “The capital markets depend upon trust, and the economy depends on the capital markets,” he explained. “We have a lot at stake in terms of making the free market economy work in a moment of historic, unprecedented levels of distrust and disgust.”

pclark@observer.com