Imposition of Fiduciary Standards Unlikely to Affect Misconduct, Study Warns

In a paper titled "Brokers, Advisors and the Fiduciary Standard," University of Kentucky scholar Nathaniel P. Graham examined the difference between the customer complaint rates of brokers and advisors. He concluded that the mix of products and services offered by employers accounts for the difference, and found that fiduciary standards do not appear to affect the rates of misconduct.

Due to the differing activities between those representatives who do not provide investment advice and those who do, higher rates of customer complaints against advisors (Mr. Graham referred to them as "advisors" rather than broker-dealer employees) was found to be caused by the difference in the products and services they offer. Mr. Graham argues that the benefits of imposing a fiduciary standard on broker-dealer employees consequently will be minimal, and that stricter professional standards are unlikely to have a significant effect economically on misconduct within the financial services industry. Mr. Graham states that higher rate of complaints were received against advisors, as compared to other registered representatives "in several important areas, such as mutual fund sales." He asserted that "efforts to address misconduct by broker-dealers are missing the larger problem of misconduct by financial advisors, which appears to be more severe."

Mr. Graham concludes by stating that because complaints appear to be related to product and service lines rather than fiduciary or suitability standards, there is "little evidence that imposing a fiduciary standard on brokers will address financial fraud." As an alternative to imposing the fiduciary standard, Mr. Graham recommends that the DOL implement "stronger disclosure rules - particularly regarding . . . compensation and incentives."