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- Title
BROKER-DEALERS AND INVESTMENT ADVISERS: A BEHAVIORAL-ECONOMICS ANALYSIS OF COMPETING SUGGESTIONS FOR REFORM.
- Authors
Demina, Polina
- Abstract
For the average investor trying to save for retirement or a child's college fund, the world of investing has become increasingly complex. These retail investors must turn more frequently to financial intermediaries, such as broker-dealers and investment advisers, to get sound investment advice. Such intermediaries perform different duties for their clients, however. The investment adviser owes his client a fiduciary duty of care and therefore must provide financial advice that is in the client's best interests, while the broker-dealer must merely provide advice that is suitable to the client's interests--a lower standard than the fiduciary duty of care. And yet these divergent standards are not necessarily evident to the average investor. As a result, investors run the risk of being placed into suboptimal investments by broker-dealers. Two competing solutions to this issue have been proposed: a higher fiduciary standard for both broker-dealers and investment advisers and a less burden-some disclosure standard in which broker-dealers would inform their clients that they are not fiduciaries. This Note analyzes these potential reforms using a traditional economics analysis as well as new behavioral-economics research. It concludes that a fiduciary standard more effectively protects investors and that a disclosure standard would actually have the perverse effect of making investors more susceptible to behavioral biases that can impair their ability to invest properly.
- Subjects
UNITED States; LEGAL status of stockbrokers; LAW &; behavioral economics; LEGAL status of investment advisors; FIDUCIARY responsibility; REASONABLE care (Law); LEGAL status of clients; INVESTMENT advisor-client relationships; INVESTORS; LEGAL status of capitalists &; financiers
- Publication
Michigan Law Review, 2015, Vol 113, Issue 3, p429
- ISSN
0026-2234
- Publication type
Article