Brokers, Advisors, and the Fiduciary Standard

The question of fiduciary duties for brokers[1] has been a popular topic of late, especially since the Department of Labor suggested imposing fiduciary duties on brokers handling retirement products in February of 2015[2].  More recently, there was an uproar after Robert Litan was forced to resign from the Brookings Institute amid accusations–chiefly from Senator Warren (D-MA)–of bias towards the financial industry in his recent report and testimony before the Senate.  The report[3], co-authored with Hal Singer, argued that DOL’s proposed rule would impose large costs on investors, particularly less-wealthy investors.  The report has been aggressively critiqued in other quarters[4] for poor assumptions and misleading analysis that runs contrary to academic studies on the performance of financial advisers.

So is that it?  Is imposing fiduciary duties on brokers a no-brainer that will save investors billions?  My own research suggests that the benefits are likely to be small, and possibly negligible.  The general idea of the DOL rule is to force brokers to behave more like investment advisers[5], who already have a fiduciary duty to their clients.  Proponents of the rule change generally assume that investors receive better treatment from advisers because of the fiduciary standard, which is much stricter than the suitability standard imposed on brokers.  However, more than 3/4 of all customer complaints are levied against advisers, who are approximately half of the industry.  Misconduct appears to be more common among advisers than among brokers, despite the difference in professional standards.

I construct my data using individual-level regulatory filings–principally the U4 form used for registration and disclosure by brokers and advisers–and examine potential reasons for the large observed difference in complaint rates between the two groups.  One important point is that four states (California, Missouri, South Carolina, and South Dakota) already impose a fiduciary duty on brokers dealing with retail customers; if complaint rates are affected by the fiduciary standard, we would expect brokers and advisers to have similar complaint rates in those states.  Contrarily, I find that complaint rates in these four states are essentially identical to rates in the rest of the country, so imposing fiduciary duties appears to have no effect on the  probability of a broker or an adviser receiving a complaint.  This result is robust to controlling for location (using the 5-digit ZIP code of the broker or adviser’s office), the year in which the complaint was received, and simple  demographics such as age, gender, and industry experience.  Proxies for the level of oversight such as firm size, branch size, whether the office is a private residence, and whether the supervisor is located at another branch also fail to explain the difference in complaint rates.

Another common assumption by proponents of the DOL’s rule change is that brokers and advisers are essentially identical and provide similar services to retail customers[6].  If the two groups are essentially the same, then it makes sense to regulate them in the same way and to impose the same duties and requirements on them.  However, I find that the difference in complaint rates between brokers and advisers varies considerably depending on the products and services their firm offers, suggesting that the two groups may not be identical–though there is clearly some overlap.  Advisers received complaints at a higher rate if they worked at firms handling debt securities, mutual funds, and investment advice.  On the other hand, advisers received complaints at a lower rate at firms handling variable annuities and life insurance, and the two groups were similar at firms handling private placements of securities.  It is not obvious that brokers and advisers are doing the same things, so it is not clear that they should be regulated in the same way.

It is possible that the fiduciary standard leads to larger payouts to settle complaints, which would be advantageous to investors.  This could happen because having a fiduciary duty makes misconduct more egregious.  I find that advisers and brokers are equally likely to have a large payout ($25,000 or  more), and that the products and services on offer have a much larger effect on the likelihood of a large payout.  Mutual funds, investment advice, and variable annuities and life insurance were all associated with smaller payouts, while private placements and debt securities were associated with larger payouts.  Payouts were not different in the four states imposing fiduciary duties on brokers.

While many complaints are not directly related to fiduciary duties or the suitability rule, imposing fiduciary duties does not appear to change brokers’ behavior, suggesting that the DOL’s proposed rule is unlikely to significantly benefit investors.  It is important to note, however, that I find no evidence that imposing fiduciary duties on brokers would harm investors, so it remains possible that the DOL rule would have some benefits.  I believe the larger and more important question is how to address misconduct by both groups, which is distressingly common.  Given the prevalence of accusations of omission of facts and misrepresentation in complaints[7], I propose that stronger disclosure rules–particularly regarding advisers’ and brokers’ compensation and incentives–would be more beneficial to investors than a universal fiduciary standard.


[1] In the legal terminology used by FINRA and the SEC, a broker-dealer is a firm, and the person most people refer to as a broker is a registered representative of the broker-dealer.  For simplicity, I refer to a registered representative of a broker-dealer as a “broker”.

[2] See for a more detailed discussion of of the DOL’s proposal.

[3] Litan, Robert and Hal Singer. (2015). “Good Intentions Gone Wrong: The Yet-To-Be-Recognized Costs of the Department Of Labor’s Proposed Fiduciary Rule”, Economists, Inc.

[4] See Dylan Matthews’ article at

[5] Similar to the term “broker”, I use the term “advisor” to refer to a representative of a registered investment advisor (RIA); an RIA is a firm in the business of providing investment advice to its clients.

[6] See Gough, Jeffrey. (2014). “Certification and Fiduciary Liability in the US Financial Advisor Industry”, PhD Thesis, Florida State University.  Helaine Olen’s article at Slate ( makes a similar argument.

[7] See

The preceding post comes to us from Nathaniel Graham, a PhD candidate in finance in the Department of Finance and Quantitative Methods, Gatton School of Business and Economics, University of Kentucky. The post is based on his article, which is entitled “Brokers, Advisors, and the Fiduciary Standard” and available here.  Some data for this study was purchased from Meridian IQ using funds provided by the Institute for Fraud Prevention; the IFP originally provided those funds to support a related study, “Is Fraud Contagious? Career Networks and Fraud by Financial Advisors”, which Mr. Graham co-authored with Will C. Gerken and Stephen G. Dimmock.