Change Comes to the SEC

Last December Elisse Walter, an SEC commissioner since 2008, replaced Mary Schapiro as SEC chair. Walter heads a five-member Commission that is short one member and split 2-2 between GOP and Democratic appointees (Walter was originally nominated by Democratic Senate majority leader Harry Reid). This schism could paralyze the Commission for a year or more.

SEC paralysis would mean bad news for Dodd-Frank, which gave the SEC authority to expand fiduciary standards to include stockbrokers and other types of sales representatives. At the moment, the fiduciary standard for ethics only applies to financial advisors who are Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs). Walter would seem to support its expansion—in a 2009 speech she argued that “financial professionals should always act in the best interests of investors”—but whether she can effect the change is doubtful.

Most investors don’t know that there are two standards governing the professionals who sell investment advice, services and products. Financial advisors (RIAs, IARs) are required to act in their clients’ best interests. Stockbrokers are held to a lower ethical standard called suitability: They are supposed to make suitable investment recommendations based on the Know Your Customer rule, which was proposed by FINRA in 2009. Know Your Customer compels stockbrokers to compile large amounts of data on their clients on the grounds that, without it, they can’t make appropriate recommendations. If stockbrokers have to adopt the tougher standard of financial advisors, the change would profoundly affect the financial service industry—to the benefit of investors.

It still wouldn’t go far enough. Sales reps and financial advisors aren’t likely to volunteer information about conflicts of interest and fees that might cause investors to reject sales pitches or terminate relationships. Enforceable regulations must change this status quo; investors shouldn’t have to find out such information on their own. Due to slick marketing, most investors don’t even know this issue exists. And political clout: Wall Street spends hundreds of millions of dollars a year on lobbyists who make sure regulations favor companies, not investors.

You might be asking why Wall Street fights higher ethical standards for stockbrokers and full transparency for all types of advisors? Simple: money. Companies maximize revenue by doing what is best for them and not investors. As long as investors don’t even realize that they’ve been taken, the strategy works.

What can you do to protect your interests until these proposals become regulations? Make sure the advisors who control or influence your financial decisions have the following characteristics and business practices.

Current Financial Fiduciaries

Make sure your advisor is an RIA or IAR. These registrations make them financial fiduciaries right now; they are already required to put your financial interests ahead of their own.

Expect Voluntary Transparency

You may not be able to expect advisors to volunteer information that has a negative impact on their incomes, but you can select and retain advisors who choose to provide the facts. And you can reject or terminate advisors who make you play 20 questions to get the information you need.


The achievement of your financial goals is way too important to rely on verbal communications. Plus, you should want a written record of the information you relied on to make your decisions. High quality advisors provide documentation because they have nothing to hide. Low quality advisors resist documentation for the opposite reason. When it comes to your money, trust what you see, not what you hear.

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