Brokers vs Advisors

Brokers vs. Advisors

Testimony by Goldman Sachs executives really did say it all

July 2010

If you were going to hire someone to recommend investments, would you want that person to be legally required to give you advice that is in your best interests, or is it okay with you if that person is free of such a requirement?

It’s hard to imagine that any consumer would choose the latter. But not only is it true that many of those in the financial services field have no obligation to serve their clients’ best interests, many consumers do not even realize that most financial practitioners do not honor this so-called “fiduciary standard.”

Yet this is a crucial issue when selecting a financial professional. Stockbrokers and insurance agents legally represent the brokerage firms or insurance companies whose products they represent. Brokers have a legal obligation to give advice that is “suitable” and “appropriate” but not necessarily best for the client, while insurance agents are required to act with “utmost good faith,” which, again, does not necessarily mean they will give their clients the “best” recommendations.

Standing in contrast to brokers and agents are investment advisors, and in particular those registered with the Securities and Exchange Commission or state securities regulator.
When serving as a Registered Investment Advisor, a financial professional is legally required to serve the client’s best interests rather than the interests of himself or his firm.

At this writing, Congress is debating a proposed reform bill for the financial services industry. The legislation initially would have required brokers to adopt the fiduciary standard, but that clause was stricken from the Senate’s version of the bill and replaced with a directive for the SEC to study the issue further. However, when the SEC filed civil fraud charges against Goldman Sachs, one of the biggest, most storied investment banks in the country, there was renewed attention placed on the issue, with the possibility that the fiduciary standard would be restored to the bill.

In April testimony before the Senate Permanent Subcommittee on Investigations, Sen. Susan Collins (R-Maine) grilled several Goldman Sachs executives about their position on this issue. She asked Daniel Sparks, former head of Goldman’s mortgage department, for “a yes or no” answer to the question of whether he felt he had a duty to act in the best interest of his clients. His response, after pausing, was merely, “I believe we have a duty to serve our clients well.”

Sen. Collins posed the same question to Fabrice Tourre, the Goldman vice president named in the SEC’s complaint as the creator of the allegedly fraudulent investment. Asked Sen. Collins, “Do you believe that you have a duty to act in the best interests of your clients?” Mr. Tourre’s response: “Senator, I will repeat that we have a duty to serve our clients by showing prices on transactions that they ask us to show prices for.”

Perhaps the most telling response came from Josh Birnbaum, former managing director of Goldman Sachs’ structured products group trading, to whom the idea of fiduciary duty seemed a foreign concept:

Sen. Collins: Should we amend the law to impose a clear fiduciary duty on broker-dealers to act in the best interest of their clients, similar to the legal requirement that is already imposed on investment advisors?

Josh Birnbaum: I think conceptually that doesn’t seem like an issue. I’m not completely familiar with how that works, but conceptually it seems like an interesting idea.
Not only did Mr. Birnbaum make it clear that he is not a fiduciary, he doesn’t even appear to know what that is!

It is our hope that all those in the financial services field — banks, brokerages and insurance companies — will be required to uphold the fiduciary standard. But until that becomes the law of the land, you can protect yourself by making sure your advisor is a fiduciary.

How can you find out if an advisor you’re thinking of hiring is a fiduciary? Simple: Just ask for a copy of Form ADV. That’s the registration statement all investment advisors must file with the SEC. We’re also required to give a copy to every client when we are hired and to offer a copy annually.

If your financial professional cannot provide you with Form ADV, he or she is not a Registered Investment Advisor. You can also check with the SEC directly by going to and clicking on “Investment Adviser Search.”

Certain Edelman Financial Services employees are dually registered as investment advisor representatives and registered representatives of a broker-dealer and from time to time effect securities transactions for compensation.