The Battle for Fiduciary Standards in Massachusetts

Conflicted advice harms customers. Imagine if an emergency room doctor refused to treat a patient but instead sent the patient to the doctor’s own clinic for more expensive treatment. We don’t let doctors practice medicine this way. We shouldn’t let brokers advise this way.

Yet federal reform efforts have failed. For example, the Obama Department of Labor issued a fiduciary rule that would have required all retirement investment advice to be in a saver’s best interest. The Fifth Circuit quickly struck down this federal fiduciary rule.

Then, the Trump-era SEC made a new rule for brokers, Regulation Best Interest (Reg BI). Despite its name, Reg BI did not require brokers to change what they do. Brokerage firms use the vagueness of the rule to continue collecting kickback payments for selling the same complex, costly and risky products as they did before Reg BI.

In the face of federal failures to fix the problem, states moved to protect the public. Nevada passed a fiduciary statute in 2017. Massachusetts put a fiduciary standard in place through an administrative rule. The MA rule requires that brokers giving advice “make recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer.” Unlike Reg BI, the Massachusetts rule means that brokers must put the interests of Massachusetts citizens first.

Because of its widespread abuses, the on-line broker Robinhood faced one of Massachusetts’s first enforcement actions under the rule. Robinhood now fights for its right to deliver advice not in its clients’ best interest in the Massachusetts Supreme Court. If Robinhood wins, Wall Street will continue to exploit the public’s trust with tainted financial advice.

To support Massachusetts and honest advice, The Institute for the Fiduciary Standard worked with law students at the William S. Boyd School of Law at the University of Nevada, Las Vegas to file an amicus brief in the Massachusetts Supreme Judicial Court.

That brief makes a simple case: Trust matters. Trust is key to our markets and our society, and it is in desperately short supply. The Massachusetts fiduciary rule gives customers the ability to trust broker-dealer advice. Doctors, lawyers and SEC-registered investment advisers (RIAs) already give advice in their clients’ best interests. Yet Wall Street’s broker-dealers have been permitted for far too long to make excessive profits by putting their own interests first.

The public often wrongly believes that brokers giving advice must put their interests first because that is exactly what brokers suggest or imply they do. But they do not; they act and are regulated as product distributors. Broker-dealers profit from this confusion.

In contrast, RIAs have always been fiduciaries under the law. Most people, unfamiliar with Wall Street doubletalk, fail to understand this difference. Research shows widespread public confusion about the differences between brokers and RIAs. Robinhood and the brokerage industry would prefer to keep it that way.

To be sure, Robinhood and the brokerage industry’s expensive, white-shoe lawyers argue that the Massachusetts fiduciary rule will drive up their costs. This appears to be the same tired, “Chicken Little” defense brokerage industry firms have run before. Its claims that the “sky will fall” if Massachusetts requires honest advice is akin to “fake news.” Honest brokers can and do serve their customers well.

Brokers giving investment advice are not in sales relationships like department store salespeople. When you shop for a pair of pants, within two minutes in the dressing room you can tell if it fits and whether you like the style and price. You can make an informed decision. Not so with complex and opaque financial products that require fiduciary expertise.

For those reasons, brokers should be held to higher standards.

The need for the fiduciary standard and the ability to trust investment advice is indisputable. They are foundational to healthy markets, a thriving economy, and consumers getting the advice that is truly best for them. The Massachusetts fiduciary rule can provide these benefits for its citizens.

Serena Ruedas is a William S. Boyd School of Law juris doctor candidate, 2023.

Knut A. Rostad, MBA, is the co-founder and president of the Institute for the Fiduciary Standard, a nonprofit formed in 2011 to advance the fiduciary standard through research, education and advocacy.

Read more articles by Knut A. Rostad, Serena T. Ruedas