Putting investors first

June 19, 2009

While the Obama administration’s financial overhaul plan falls short on a lot of big issues, it does get some of the smaller things right. One smart move by team Obama is a call for brokers to put clients first when making financial decisions.

The Wall Street Journal did a good job today in noting that one proposal buried in the Obama’s 88-page plan would change the legal standard of accountabilty for brokers. Right now, brokers are only required to put clients into investments that are “suitable” for them–a pretty squishy standard. But Team Obama would like to change this and require brokers to have a fidcuiary duty to their clients.

Now this may just seem like a lot of semantics but it’s not. Anyone who has a fiduciary duty is required to put their clients before their own interests in making investment decisions. Lawyers, accountants and regulated investment advisors long have had this duty, but brokers did not. That meant brokers were free to pitch products to clients they might have an incentive to sell–ie, lots of in-house proprietary products.

This change in legal duty also should make it easier for investors to sue their brokers for damages. The debate now just won’t be over whether a broker put too much of a client’s money into a particular type of risky investment. An investor will now be able to argue a broker did them wrong by thinking about a commission first and not the least costly investment opportunity.

Felix Salmon, my colleague in opining/blogging/commentary, applauds this big change. And so do I.

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