Much has been said and written in the past year about standards to which advisors are held. This has been primarily due to the recent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which included a provision requiring the SEC to study the oversight of brokers and Registered Investment Advisers (RIAs).
While there are many nuances to the oversight differential, it really boils down to one thing: RIAs are held to a fiduciary standard; brokers are held to a suitability standard. Briefly, a fiduciary advisor is required to act with undivided loyalty to the client, including disclosure of compensation methods and conflicts of interest. On the other hand, the broker’s suitability standard requires only that the broker’s recommendations are suitable for the client’s situation.
Those two definitions are on opposite sides of quite a chasm, don’t you think? I think that the consumer of financial services deserves to receive advice from an advisor who has their best interests at heart. (Full disclosure: in case you hadn’t already guessed, I’m a fiduciary advisor.)
This is not to say that a broker is not capable of having undivided loyalty to the client – I’m sure many do, even though they’re not required to. What is disturbing is the fact that the broker industry has been strongly opposing the fiduciary standard – with the argument that it will be costly to implement and will leave certain lower-end consumers without an affordable choice.
Wait a second… does that mean that in order to serve these lower-end consumers, the professional has to provide recommendations that are not in the best interest of the consumer? What other compromises are there?
I’ll repeat myself: I think that the consumer of financial services deserves to receive advice from an advisor who has their best interests at heart. I realize that the whole concept (this study by the SEC, that is) is only so much legalistic mumbo-jumbo for most folks. And honestly, since the big money is on the side of the brokers and insurance companies, I don’t expect for a true fiduciary standard to be applied to all advisors after the SEC’s study.
But this is a law that you can write for your own world. If you agree that the F word rocks – that is, a fiduciary standard makes sense to you – then you can take charge and require that all advisors that you work with are held to a fiduciary standard. This way, no matter what the SEC does, you’re covered.
Generally speaking, the broker is paid to do one thing: sell financial products. If you’re in the market for a financial product and you know what you want to purchase, by all means, go to a broker and buy it. But if you’re looking for advice in your best interests, look for a fiduciary. That’s what they’re paid to provide. And when you do, I’m betting you’ll be glad you did – the F word rocks!