Lynn O'Shaughnessy

The court decision has inevitably led many smart people to ask this question: What's going to happen next? No one knows. The SEC may balk and try to kick this question up to the U.S. Supreme Court. Insiders are expecting that the powerful brokerage industry will try to shred the judicial decision by getting its pals in Congress to pass legislation that, at the very least, protects what has been the illogical status quo.

Without the courts or politicians intervening, these fee-based accounts will have to be treated differently. Brokerage firms could end up converting these accounts into the traditional commissioned-based model. Rather than paying a fee for services, customers would be charged through the commissions generated through mutual fund purchases, stock trades and other financial transactions.

This would not be a happy development because compensation through commissions creates worrisome conflicts of interest. To get paid, a broker must select investments that carry commissions even if they don't represent the best choices for the customer. Under this system, some brokers would also be more inclined to recommend variable annuities and equity-indexed annuities, which generate unusually large commissions, but are almost always dreadful choices. The commissioned approach can also encourage unethical brokers to churn accounts by trading stocks simply to generate new commissions.

The better solution would be for brokerage firms to tear off their Darth Vader masks and allow brokers, who desire to become fiduciaries, to do so. There are untold numbers of intelligent and conscientious brokers who are very eager to embrace the fiduciary mantle. They just need permission.

Lynn O'Shaughnessy

Lynn O'Shaughnessy is the author of Retirement Bible.

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