I’m going to weigh in on a topic that annoys the crap out of me. It involves the frantic efforts of the brokerage industry to avoid being held accountable to the same standards that I am held to when I offer financial advice.

From the earliest days of the 20th century, the brokerage industry generated revenue from the sale of stocks and bonds. There was more to it than that but that was the essence of how those folks made money.

Then along came mutual funds which bundled stocks and bonds into a package that could be sold and marketed to the “common man” who might not otherwise have enough money to buy a round lot of a given stock, by standard, 100 shares.

Later, mutual funds became marketed inside variable annuities, which gave the participant a temporary tax shelter against the taxable gain inherent over time as the value of the underlying positions gained in value.

Meanwhile, the industry is loving this, since all this additional effort resulted in an ever expanding revenue source for the brokerage firms. There was an explosion of smaller brokerage firms who were following the money. It all added up to a huge industry by the end of the last century, run by financial elites, some of whom are now in jail, but for many was a source of immense wealth. And all the time, they were barely held accountable for their mistakes.

In the late 80’s until now, the evolution of revenue generation by the brokerage industry shifted heavily toward “investment advice” for which additional fees could be charged. Mutual funds alone charge fees, and now we can also charge you for knowing which mutual fund to choose. For the 99% of us on the low end of the economic spectrum, this was probably a good thing since it at least gave the appearance that the motivation of those offering the advice was aligned with those who were buying the advice.

As this “advice” was maturing, there evolved the “independent advisor”, someone relatively independent of the brokerage industry who worked hard to differentiate herself from the herd who populated the Morgan Stanleys, MerrilLynch offices and the like. This part of the industry evolved into what are now known as Registered Investment Advisors, accountable to either the Security and Exchange Commission, or the equivalent at the state level.

If one is in the business of offering investment advice, for a fee, and is a Registered Investment Advisor (an RIA) then you are held to a fiduciary standard. What this means is that you are legally, morally and ethically bound to do what is in the clients best interest at all times. The folks in the aforementioned brokerage houses, offering presumably the same advice, are not held to a fiduciary standard. And the brokerage industry is fighting tooth and nail to keep it that way.

InvestmentNews magazine had an article in their August 21, 2011 issue that talked about a recent court decision where “…the U.S. Court of Appeals for the District of Columbia Circuit vacated a Securities and Exchange Commission rule that would have made it easier for shareholders to nominate company directors. Although the proxy access rule is unrelated to fiduciary duty, the court opinion echoed the case that fiduciary critics are making.”

“We agree with the petitioners and hold the [SEC] acted arbitrarily and capriciously for having failed once again … adequately to assess the economic effects of a new rule,” the court opinion stated.

The court held that the SEC fell short in quantifying certain costs — or explaining why they couldn’t be quantified — and didn’t support the predicted benefits. That court ruling could be used against the SEC and the Labor Department as they work to develop and expand the fiduciary standard for those giving investment advice.

The two Republican commission members dissented from an SEC staff study that recommended applying the fiduciary standard to anyone who gives investment advice. That standard, which requires that financial advisers work in their clients’ best interest, is more rigorous than the standard followed now by brokers, who must make sure only that the investments they recommend are “suitable” for their clients.

This is why I am pissed off. As a Registered Investment Advisor, I am held to the standard that says I’m accountable to the law for what I say and do with respect to investment advice. I am legally, morally and ethically bound to do only what is in my clients best interest.

Someone claiming to provide similar advice but as an affiliate of one of the thousands of broker/dealer organizations across the country, can say whatever they want to say, call it “investment advice” and are effectively NOT held accountable for what they say and do, except that it must conform to something deemed “suitable” for the client. However, there is nowhere a definition of what is “suitable”.

Personally, I embrace the fiduciary standard to which I am held accountable. If ever I want to be judged professionally in the same class as an attorney, a CPA or a doctor, all of whom are fiduciaries, then I better behave myself accordingly if I expect to continue to be treated with respect and to benefit from a meaningful client/advisor relationship.

I’m sure there’s going to be more on this.