– Tamar Frankel, an authority on securities law, is a professor at Boston University School of Law and author of “Trust and Honesty: America’s Business Culture at a Crossroad.” The opinions expressed are her own. –
Historically securities brokers have been viewed as salespeople with special legal responsibilities: Treat customers fairly, follow special rules regarding the customers’ money and securities, and recommend to customers only suitable investments. Brokers offered liquidity by creating markets in certain securities, actions also subject to special rules designed to ensure customers were treated fairly.
Through the years, broker dealers also began to offer investment advice and financial planning. They not only collected commissions, as do pure-play brokers, but sometimes charged a percentage of the clients’ assets, as do advisers. Thus, small and large brokerage firms and banks, which have entered the fray, offer four types of services: Brokerage, dealership, advice, and financial planning.
While these four functions are differently regulated, the customers — and many of the broker-dealers-advisers-financial planners themselves -– don’t know the difference. Legally, broker dealers are not subject to fiduciary duties; advisers and planners are. The difference between broker dealer regulation and fiduciary law is fundamental. Broker dealers can act for their own benefit, but must do so fairly. Advisers and financial planners must provide service solely for the benefit of their clients.
What does this difference mean in practice? A broker may offer a client securities that, while suitable for the client, may be more costly because the broker dealer received higher commissions or compensation for “pushing” the particular securities. Other securities would be better for the client, but the client never hears about them. If advisers recommend with incentive pay, they can be liable for breach of fiduciary duty, unless they make it clear to the client that they received financial or other incentives to make the offers. Brokers are assumed to engage in “sales talk,” aimed at inducing a sale or another transaction. Advisers are assumed to give advice solely for the client’s benefit.