Practical analysis for investment professionals
28 June 2016

Josh Brown on the Fiduciary Standard and Fintech


The fiduciary standard and business-to-business financial technology (fintech) have the potential to improve financial markets for investors, according to Josh Brown, CEO, Ritholtz Wealth Management.

From his previous experience as a broker, Brown knows how selling investment products to clients rather than advising them creates ethical and financial problems.

“Everything I learned was backwards, wrong,” Brown told Lauren Foster during a Take 15 interview. “I had a front-row seat for how not to do things.”

Brown, who blogs at The Reformed Broker and is the author of two books, maintains that the retirement crisis in the United States stems from a lack of personal finance and investing education in high schools. When people go to invest in a retirement fund, Brown says, a principal-agent problem can arise, because the interests of financial advisers are not always in line with those of their clients. Investors’ lack of financial literacy and the absence of fiduciary standards make it possible for financial salespeople to take advantage by charging high commissions, fees, selling concessions, and by investing in ways that benefit the firm rather than the investor.

“There are people, who are practitioners, who are literally working against their clients,” Brown said.

As a result, investors’ savings often underperform and are insufficient for retirement. From Brown’s perspective, there is an obvious need for regulation. The Obama administration and the Department of Labor (DOL) developed a best-interest or fiduciary standard, which would require brokers to act as fiduciaries. Previously, only Registered Investment Advisors (RIAs) had to meet that standard, whereas brokers had lower criteria: Their recommendations only had to be suitable for clients, even if there were better or lower cost investments available. This new standard will need to survive opposition from Congress and industry groups before it goes into effect.

“We [Ritholtz employees] all agree that investors should understand what they’re invested in. There should be zero conflict,” Brown said. “There should be as much transparency as an investor asks for into our process: Why did we pick this portfolio for you? And everything should be tied to their goals instead of some ridiculous thing like alpha or Sharpe Ratio that has no impact on their life.”

Brown believes that fintech can also improve investor outcomes. However, he does not believe that nonprofessionals need it. Brown has written that innovation helps the market work better for investors, but the total addressable market for fintech is small, as it should only be for professional traders. He attributes the notion that nonprofessional investors need fintech to a general attitude that stocks are “America’s pastime.” Brown challenges the ideas that “everyone should be trading” and “everyone can be the next big trading superstar.”

“B2C fintech, a lot of it, is a solution in search of a problem. Nobody actually needs trading software,” Brown said. “A lot of fintech seems to be focused on trading technologies for regular people and it’s just absurd. They have no chance of making money. They can only lose money.”

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: CFA Institute

About the Author(s)
Matthew Borin

Matthew Borin was an intern at CFA Institute. He was pursuing a bachelor's degree in economics from Williams College, Williamstown, Massachusetts.

1 thought on “Josh Brown on the Fiduciary Standard and Fintech”

  1. Our frustration as a managed account provider: Technology is blocking our access to provide discretionary management, which people are begging for. Most platforms cannot provide trading on the back end (or require a phone call for each of 300-400 clients).

    So we are required to have clients share user names and passwords. But the overprotective nature of cybersecurity is creating an environment where the individuals themselves are unable to efficiently access their account online, let alone hire a discretionary manager like us to do so on their behalf.

    The solutions are simple, but good luck motivating the big players to implement them.

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