My fellow cajun and GMU colleague – over in the law school – J.W. Verret was interviewed earlier this week by the Wall Street Journal on legislation that would impose fiduciary duties on broker-dealers toward their clients. Here’s an excerpt:
DJ [Deal Journal]: How would this proposal change Wall Street?
Verret: It’s a ground-breaking already to require broker dealers to uphold a fiduciary duty. It’s doubly ground-breaking to criminalize the violation of those duties. Brokers have an obligation to get their clients the best price, like a real-estate agent. But fiduciary duty goes above and beyond. It puts all the risk on the broker.
DJ: What are the potential consequences of this proposal?
Verret: If you pay a financial adviser at Fidelity to nursemaid your investment you are going to pay a higher fee. But a sophisticated investor wants the freedom to hire a broker to make a trade. That freedom of choice is going to be hampered by this proposal. Broker-dealers are going to have to hedge and insure against the risks. There are huge transaction costs to making this criminal.
DJ: What’s wrong if an investment bank has to spend more money?
Verret: I worry the cost of doing business will be passed along to investors. [The amendment's sponsor Sen. Arlene] Specter hasn’t hasn’t thought through how this amendment will change how markets function. [Specter] suffers from a fundamental misunderstanding of how markets function. This could freeze up markets in the middle of a slow recovery.