By David Meyer
The Chairman of the President's Council of Economic Advisers drafted
a memorandum on January 13, 2015 that shared research findings regarding
inappropriate stockbroker practice. According to the memo, some broker
practices, such as boosting commissions through excessive trading, or
churning, cost investors between $8 billion and $17 billion every year. The memo
also notes that the researchers' estimates of up to $17 billion in
investor losses are "quite conservative."
The memo makes the argument for a regulation imposing a
fiduciary duty on brokers handling retirement accounts that would require them to always
act in their clients' best interest. Unsurprisingly, the large brokerage
firms on Wall Street, notably
Morgan Stanley and
Bank of America Corp., have spent years lobbying against the induction of this rule, citing
additional costs to the proposed regulations.
In contrast, according to the Labor Department, a fiduciary duty on brokers
would provide meaningful protections to investors and an effective update
to an outdated standard. Academic research has established that
conflicts of interest affect financial advisors behavior and that advisors often act opportunistically
to the detriment of their clients. Although the new rule would not ban
sales commissions, the proposal would be a middle ground that requires
brokers to guard against conflicts and avoid certain self-dealing transactions.