The Securities and Exchange Commission (SEC) is attempting to develop standards for both registered investment advisors and brokers. Currently, most consumers don’t know the difference between a broker at a big wirehouse and a financial planner. They both deal with financial issues so they are seen as the same. This ignorance is damning to the consumer.
Registered investment advisors are required to act as a fiduciary, meaning these advisors must put their client’s interest ahead of all others, including their own. Brokers, on the other hand, only have to get past the suitability standard for clients. This means the product being sold is suitable for someone in the client’s situation. The brokerage and insurance industry argues that this is equivalent to a fiduciary standard and often times is better, but the reality is this suitability clause allows brokers and insurance salesmen to hide conflicts of interest and sell higher commission products. The fact that the insurance and brokerage industry are fighting this proposal should tell you something.
Brokers who work for insurance companies have united against the proposal. They claim that a fiduciary duty is vaguely defined and won’t protect investors any better than brokers’ suitability requirement. The National Association of Insurance and Financial Advisers sent an email alert to its members urging them to rally against the proposal.
A fiduciary duty, depending on how the SEC defines it, could revolutionize the way brokers market products and services by requiring them to disclose conflicts of interests. For example, brokers could now be required to tell their customers that they receive bigger commissions for selling certain higher-fee mutual funds.
Brokers do not have tell clients if they receive higher commissions for certain products, nor do they have to tell a client that their brokerage may have an investment banking arrangement for a certain company whose stock or bond the broker is recommending. The brokerage world can hide conflicts of interest by inundating a client with facts and figures (or putting lipstick on a pig as it is called from inside the brokerage world). Insurance agents must be reeling from this potential change because they would no longer be justified sticking a client in a whole life or variable life insurance policy when a term policy would be in the client’s best interest. There goes a fat commission.
Registered investment advisors are worried too that the SEC will craft a fiduciary standard that favors the brokerage world at the expense of the client. Or, it may place additional administrative burdens on registered investment advisors who are typically smaller firms.
The bottom line for you is finding an advisor who puts your interests first. Do you really want to put your life’s savings in the hands of someone who doesn’t have a legal responsibility to do what is best for you? Numerous people who use brokers acknowledge the conflicts of interest but feel that “their guy” does what is best for them. I then ask them, “how do you know.” After the blank stare, I usually get “he told me so” or “we are friends so he does me right.” Just cause you play golf with someone doesn’t mean they are putting your interests first. In fact, they could be using your friendship and trust to make as much as possible from your account. There is a big difference between telling someone you will put their interests first and having a legal liability to do so.