Part of the recently signed financial reform bill addresses the fiduciary standard and how it applies to financial advisors.
Currently, Registered Investment Adviser (RIA) firms (like Brooks, Hughes & Jones) are obligated to act as a fiduciary. This means we must make recommendations and provide advice that is solely in the client’s best interest.
Many other advisors, primarily employed by brokerage firms that spend billions on advertising and lobbying –Merrill Lynch, Morgan Stanley, Edward Jones, etc. – currently have to meet only a suitability standard. This means that products they sell should be suitable for the client, given known information about the client. But they don’t have to be unquestionably in the client’s best interest.
The House of Representatives version of the financial reform bill required all financial advisors to operate from the fiduciary standard. Under heavy influence, however, it was amended before signing. What is written into the bill is the authority for the Securities and Exchange Commission to apply the fiduciary standard to all, but not until the SEC completes a six-month review of the subject.
Since Congress failed to fully approve the fiduciary standard, it’s not hard to imagine brokerage firms successfully lobbying the SEC to maintain status quo.
When this study is completed, the SEC will be able to draft its own rules around who is required to act as a fiduciary. As it stands now, brokers would have a two-tiered fiduciary responsibility. If they provide specific, personalized advice, they would have to act as fiduciaries. After they provide this advice, they will no longer be fully subject to a continuing standard in future investment recommendations. This means that a broker’s allegiance could change depending on the situation.
In the current bill, the SEC may also allow brokers to sell a limited range of products (even proprietary) provided they give notice to the customer and obtain consent or acknowledgement.
What it comes down to is paying an investment advisor or financial planner for advice or paying a registered representative to sell a suitable product. The difference may be subtle to most but represents a substantial difference in independence, objectivity and understanding of whose side the “advisor” is really on.
There are certainly many good financial professionals who work for wirehouse brokerage firms. And there are RIAs and CFPs who have done wrong. However, given the opportunity to work with the highest standard of stewardship for your life savings, you may want to consider the meaning of the word fiduciary and look for an advisor willing to operate from its definition in all matters.
We’ll closely follow the SEC’s six-month review and follow-up then.