(Dow Jones) Wall Street headhunter Danny Sarch has a simple reminder for those who want to make brokers adhere to fiduciary standards of service for the sake of protecting consumers. "Madoff was an RIA," he said.

RIAs, or registered investment advisors, are businesses regulated by the Securities and Exchange Commission and bound by the Investment Advisers Act of 1940 to a fiduciary standard that boils down to a duty to disclose "all material facts" and "employ reasonable care to avoid misleading" clients, according to a 1963 U.S. Supreme Court ruling.

Brokers, whose legislative touchstones are the Securities Act Of 1933 and the Securities Exchange Act Of 1934, are expected to make recommendations for securities purchases based on an informed determination of their suitability to the buyer, which includes cost considerations and the buyer's general understanding of the securities in question.

This has given rise to the notion, deftly promulgated by RIAs themselves, that RIAs operate on a higher ethical plane than brokers. Now, with lawmakers eager to look as though they're fighting for consumers in light of the Bernard Madoff scandal and a more generalized, recession-spawned distrust of big-name firms, moves are afoot to force brokers who hold themselves out as advice givers--and, technicalities aside, that's just about all 644,000 of them--to become fiduciaries.

In fact, last month Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee, submitted draft legislation that would do just that, a move hailed by the Investment Adviser Association, an RIA advocacy group, as "a very thoughtful and knowledgeable approach" to regulatory reform.

But Sarch thinks the whole "fiduciary or not" argument misses the point. "It's not a regulatory issue; it's an integrity issue. Good guys are good and bad guys are bad. And that's all there is to it," he said.

To be sure, regulation discourages wrongdoing and can help authorities catch those bad guys. But then brokers are regulated, by the private sector Financial Industry Regulatory Authority, which last year expelled 19 firms and expelled or barred 684 individuals from the securities business. Madoff managed to avoid having to register as an RIA for years, succumbing only in 2006 under pressure from the SEC during one of its basically hapless examinations of his business.

Some financial professionals believe that forcing brokers to become fiduciaries would curtail consumer options. For now investors "can go to an RIA or go to a brokerage, or they can go online to Schwab or Ameritrade and make a trade for like 10 bucks," one broker said. If he and other brokers are formally required to adhere to fiduciary standards, investors "will get less, less in their choices of what they want to pay for."

Barring the advent of a retail-investing universe where the only choices are online self-direction and fee-only advice, however, the move to turn brokers into fiduciaries is likely to run afoul of demand for professionally guided securities transactions.

"I don't see how you can cover payments for transactions with fees [on assets under management]. Merrill Lynch tried that with its Unlimited Advantage program, and they wound up getting sued by people who said they'd reduced [trading] activity on the accounts," said Sarch.

First « 1 2 » Next