InvestmentNews.com has a good story on Charles Schwab (SCHW) and TD Ameritrade’s (AMTD) lobbying efforts in Washington over the Fiduciary issue. While they are fierce competitors in everyday business, they’re teammates when it comes to battling Washington.
Here’s a brief explanation of a fiduciary obligation:
A fiduciary obligation exists whenever the relationship with the client involves a special trust, confidence, and reliance on ithe fiduciary to exercise his discretion or expertise in acting for the client. The fiduciary must knowingly accept that trust and confidence to exercise his expertise and discretion to act on the client’s behalf.
In other words, a fiduciary is held to a very high standard when it comes to acting in the interests of clients. This makes sense when it comes to trusts, money management, and legal advisement.
However, it may be a problem for the discount brokerage industry.
Here’s an excerpt from the InvestmentNews piece:
We’ve had discussions with Schwab about how we can put the two of us together to make more impact,” J. Thomas Bradley Jr., president of TD Ameritrade Institutional, said in an interview yesterday at the Financial Planning Association’s annual conference in Anaheim, Calif.
The issue is “about consumer choice,” he said. “That is, don’t blow up the discount-broker model” by imposing a fiduciary duty on brokerage firms that handle do-it-yourself investors, Mr. Bradley said.
I like the stance of the industry here, and I hope to see other companies like optionsXpress (OXPS) and E*Trade (ETFC) get on board here. These firms don’t need to go out of their way to make sure every self-directed client is adapting to some arbitrary standards of what’s suitable and what isn’t.
Now if a firm is providing a client with end-to-end financial advising, then it should be held to a very high standard when it comes to providing suitable products. In those cases, the client should absolutely, positively have a legal right to have their needs come first.
But self-directed investors are a different breed altogether and don’t need the same level of legal protection. It would simply place upward pressure on fees and commissions as online brokers spent more money servicing them.