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Re-activateWhen someone offering financial advice touts an investment, should that advice be based on what's best for you or for him?
That's a no-brainer, right? The recommended investment should be what is best for you. But in the world of financial advice, that's not always what happens. If the "adviser" is actually a broker or broker-dealer, he's merely required to recommend something "suitable." Suitable can mean the investment satisfies your need for a particular type of investment—say, a U.S. biotech stock or small-cap international fund. But that suitable investment might not be the least-costly for you. The broker-dealer might in fact favor it for its higher commission.
Thanks to a new study by the staff of the Securities and Exchange Commission, however, putting the client's financial interests first—also known as a fiduciary standard—may finally become a requirement for anyone providing financial advice. The study, authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act passed last July, recommends that the SEC write rules requiring that everyone who provides retail customers with personalized investment advice about securities now be subject to the same fiduciary standard.That's a good thing, considering that the SEC study and a recently-released report on financial planners by the Government Accountability Office, both show that consumers are clueless about the different standards under which people dispensing financial advice operate. They don't necessarily know the difference among the dozens of different designations and titles advisers assume, including certified financial planner, financial consultant, financial adviser, investment adviser, registered investment adviser, investment counselor, and wealth manager. And they may not realize that while financial advisers, regulated by the Investment Advisers Act of 1940, must exercise fiduciary duty, others don't have to.
FINRA, the financial industry's self-regulating organization, is primarily in charge of examining and policing broker-dealers. Last week, in response to the SEC report, FINRA issued a statement acknowledging that more frequent broker-dealer examinations would be of use, as noted in the SEC report. And, the group acknowledged, "Investors deserve the same level of protection regardless of whether they are dealing with a broker or investment adviser."
The GAO report disappointed many in the financial-planning industry by stating that there's no need for additional regulation of financial planners. In spite of this, the SEC could still proceed to establish rules to place anyone in contact with retail securities investors under a uniform fiduciary standard. We recommend the commission do so posthaste.—Tobie Stanger
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