Goldman Sachs and the Future of a Fiduciary Standard


Goldman Sachs and the Future of a Fiduciary Standard


Financial reform is making headlines lately, particularly in light of the lawsuit the SEC filed against Goldman Sachs. Once again the role of a fiduciary standard is being raised by investors, politicians and regulators alike. If nothing else, the Goldman case is helping to shed light on the difference between the fiduciary standard and the suitability standard, something that is often confusing in the world of investment advice.

Let's review the significance of the fiduciary standard and what it means to you. Federal and state law requires that registered investment advisors, like me, be held to the fiduciary standard, requiring me to act solely in my client's best interest, even if that conflicts with my financial interest. As such, I must disclose any conflict, or potential conflict, to my clients. On the other hand, registered representatives of brokerage firms adhere to the suitability standard, which means their recommendations need to be "suitable", which is not the same as what is best, for the client.

Currently, investors bear the onus of determining whether the financial professional providing them advice is upholding the fiduciary standard or the suitability standard. However, many in the industry and now some politicians are advocating for a clearer distinction between the two and are debating whether the fiduciary standard should be adopted uniformly for all professionals who offer investment advice. Many feel that financial professionals who focus on selling products should be required to disclose the details of the products they are offering to investors--something the SEC charges that Goldman Sachs should have done with the investment the firm structured for John Paulson.

Clearly the fiduciary standard is under closer review since details of the Goldman Sachs situation came to light. While legislators and regulators will continue to debate this issue in the weeks to come, it is unclear at this point how the issue will be resolved. As a registered investment advisor who adheres to the fiduciary standard, I believe that the current dual standards for regulating professionals who give financial advice is confusing to most investors and is not in clients' best interests. It is my hope that financial reform legislation will provide clarity and protection for investors.

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