The idea of having a fiduciary relationship with your investment provider is a topic that has generated a great deal of heated discussion over the years. As it stands today, only firms that are Registered Investment Advisors and operate under the regulations established in the Investment Advisors Act of 1940 are considered fiduciaries. In other words, Registered Investment Advisory firms have a duty to act in the best interests of their clients coupled with a higher standard of disclosure. In the world of professional services, only attorneys and CPA's observe this same standard. That is an important fact when considering an investment professional. Most brokerage firms have employees, known as registered representatives, who are only required to offer recommendations that are "suitable" for the investor. Suitable investments can accomplish a stated goal, but do not have to be in the best interest of clients. For example, an investor wants to save for retirement and a registered representative offers them an investment that has high internal expenses and pays a high commission. The investment is considered suitable because it meets the savings objective, but a lower cost and lower commission product might be available that could be more beneficial to the investor. Congress has suggested on many occasions that brokerage representatives should be taking some form of fiduciary duty, but brokerage firms have successfully lobbied against it. This happened again in Senator Dodd's recent financial reform bill that initially added fiduciary responsibility for brokerages and representatives, but removed the fiduciary language under heavy industry lobbying. This battle has waged even down to the titles registered representatives use. The title "financial advisor" was once reserved only for those who represent a registered investment advisor, but brokerage firm lobbying has allowed registered representatives to use the same title.

When people become clients of a brokerage firm, they often believe those firms want nothing more than to help them achieve financial success. Those firms market themselves as being very client centered. And yet when challenged, those firms seem all too willing to drop any fiduciary obligation to clients. That is the heart of the Goldman Sachs case. Without getting too far into the weeds, the SEC has filed suit claiming that Goldman Sachs created an investment vehicle backed by questionable mortgages and their representatives sold it to clients without fully disclosing the firm's position of betting against these same types of investments. Goldman's response has been a mixed message of stating the firm has "...a duty to do well for our clients", while at the same time stating they do not "...act as an investment adviser to our clients." So the underlying question here is whether Goldman Sachs is acting as an "advisor" to their clients, or simply offering them "suitable" investments? It seems that these firms want to create the perception of fiduciary duty, but when the pressure is on, they want to fall back on the old suitability rule.

I expect Goldman to fight this briefly and ultimately settle with the SEC. Even if Goldman Sachs feels it can win the lawsuit, it will likely be long and is expensive. More important, the longer this goes on and stays in the news, the longer the underlying issue of fiduciary duty remains in front of all brokerage firm clients...and that could damage the image of Goldman Sachs and the entire brokerage industry. When it comes to fiduciary duty, brokerages will find it hard to have it both ways by marketing a client centered approach, then backing away when it becomes clear the firm did not operate in their clients best interests. .