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Brokers will soon be expected to put their clients' interests above their own. Well, it's about time. 

In the WSJ:

In Obama's Overhaul, Big Change for Brokers

Buried in President Obama's proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher "fiduciary" standard that would compel them to place their client's interests ahead of their own.

Currently, brokers are only required to offer investments that are "suitable," which means as long as they don't put clients in inappropriate investments, such as a highly risky stock for an 80-year-old grandmother. The move could change the way products are sold and marketed and even how brokers are compensated.

"This is a smart

and overdue move" for the large brokerage firms owned by investment banks, says Sallie Krawcheck, who formerly ran the wealth-management business at Citigroup Inc. "It's certainly a victory for clients."

Many investors don't even know the difference between the two standards, believing their brokers already are acting in their best interests. You would think a glance at thier brokerage statements would clue them in, particularly when the markets aren't in a raging bull cycle. See Super Brokers form to push Super Broken products to make those with High Net Worth Super Broke!  

But requiring brokers to operate under a fiduciary standard could force them to offer products that are less costly and more tax-efficient. They will have to disclose any potential conflicts of interest, such as any fees they may get for favoring one product over another. That could mean clients will be offered fewer proprietary products if the broker can find a lower-cost option elsewhere. Nahhh!!! Say it aint' so! Those damn brokers can't push their real client's offerings to you any more??? I'm curious what would have happened if this rule would have been enacted when Merrill Lynch started unloading all of their bad REIT debt to unsuspecting income investors who thought they were getting a good deal buying literally unpayable debt in the form of secondary offering common stock. Then there is just bad advice period, see  666: That's the sign of your big broker giving you bad investment advice!

For example, a broker couldn't put you in a mutual fund with higher fees -- or one he gets a bigger commission for selling -- if he could get a comparable fund with lower fees elsewhere, says Tamar Frankel, an expert on fiduciary law at Boston University School of Law.


For years, investment advisers -- regulated by the Securities and Exchange Commission as part of the Investment Advisers Act of 1940 -- have been held to a fiduciary standard, meaning that in serving the clients, they have to put their clients' interests first. Brokers were excluded from that definition of investment advisers as long as they didn't get paid special compensation for that advice, and gave it as "solely incidental" to their brokerage services.

But over the years, that distinction became more blurred as brokers held themselves out as financial planners, even as they continued to operate under the more lenient standards. Making matters more confusing is the fact that some brokers became dually registered, operating under a suitability standard when they are selling products, but under a fiduciary standard when doling out investment advice.

Richard Ketchum, chairman of Finra, says he supports the administration's idea "that a fiduciary standard should be established for broker-dealers when they are offering investment advice." He said the SEC should lead a discussion of how to define those situations and adds there are features of both broker and adviser regulation that should be kept.

The change also will give investors more power if they take their broker to court. "If a fiduciary violates his duty -- that is, gives advice which is contaminated by self-interest -- he could be sued not only for damages that have been caused for this advice but could also be sued for punitive damages," says Boston University's Ms. Frankel. Again, this REIT offering thing could get interesting... Just imagine the liability garnered just recommending or worse yet, actually selling all of the equity offerred by the banks, with brokers/banks knowing the condition of their own balance sheets, not to mention the conditions of others. Ignorane definitely would not be a defense here. A resourceful litigation attorney should be in heaven, just from reading this blog.

The tougher fiduciary standard would discourage brokers who charge commissions per trade instead of fees based on a client's assets under management, says Alois Pirker, a senior analyst at research firm Aite Group LLC. That is because brokers could be accused of recommending trades simply to drive up their fees. Some firms, such as Bank of America Corp.'s Merrill Lynch unit and Swiss banker UBS AG, have already been moving away from the commission mode, and have been encouraging brokers to also register as investment advisers, placing them under the tougher fiduciary standard when giving advice. This article is missing a greater point. Unless I am dead wrong about the condition of the banks, which I am sure I am not, any bank that offers for sale a bank stock - particularly their own or similar stock - is lining itself up for a hell of a suit. You can not say you did not know the condition of your own inventory. Wall Street brokers and sales entire profit engine is built from, and tantamount to, selling lies to its retail and institutional customers. That is how this blog is able to consistently outperform them. Don't get me wrong, I think I am a smart dude who hires smart people, but come on now. Most of the alpha comes from the fact that I don't have conflicting interests with those that come to visit the blog. Broker/banks entire business model is built off of said conflict.

The Securities Industry and Financial Markets Association, a Wall Street lobbying group, has pushed for updating standards so brokers and financial advisers are held to the same rules when they provide the same service to clients. But the group stops short of saying standard should be the more expansive and potentially more costly fiduciary standard.

The following is an excerpt from the performance article that I published last year. This most recent quarter was a down one for the blog, but the overall relative position to the brokers is still far superior. 

Reggie vs Wall Street

As many may have surmised, my team and I have blown out the results of Wall Street's biggest and most reknowned name brand brokers. It wasn't even close enough to fit in a small graph. JP Morgan failed to beat the S&P over the period that the blog has been in existence (since 9/07). The blog's research returns are 132% above the BEST performing Wall Street Broker's analyst recommendations. For the supporting data that goes behind this study, see Blog vs. Broker, whom do you trust!. Please click the graph to enlarge to print quality size. 


  Reggie vs Goldman Sachs

Why didn't Wall Street read my post on Lehman being a yellow lying lemon? See "Is Lehman really a lemming in disguise?" and realize that this post was made on February 20th, when Goldman Sachs had a recommended price of about $55 while this blog warned that Lehman may be done for. This very similar to when I warned about the potential demise of Bear Stearns in January, when the rest of the Street had a "buy" at about $130 per share. See Is this the Breaking of the Bear?.  7 We all know how both of these stories ended. Please click the graph to enlarge to print quality size. 


 If you look into my original post on performance (see "Performance!"), you can see when I made strong bearish positions on Morgan Stanley and Goldman Sachs, both highly contrarian views at the beginning of the year, and both returned way over 100% and in the case of Goldman, is still pushing profits.