Investors Shouldn’t Settle For What Is ‘Suitable’

27354246_sSusan and I recently taught a class on retirement at the Falmouth Recreation Center through the Falmouth Adult Education program. In this class we teach folks how to cement a solid retirement foundation so they don’t have their golden years crumble. One of the six areas we cover is investments. Unsolicited, one of the students spoke up and said that it seems his broker is not working in his best interest, and his broker is his best friend.
If you are a regular Cutter Family Finances reader (or even just a casual one), you have probably noticed that I end every article with the phrase, “Be vigilant and stay alert, because you deserve more.” This isn’t just a thoughtless sendoff phrase to fill up the remaining word count for the column. I write that each week as a reminder from me to you. Do not put your head in the sand. Do not accept the status quo. Do not simply follow the herd. We are facing financially challenging times and you owe it to yourself to be actively involved in planning for your financial future. Now is the time where you need to take control.
This begins with understanding the role and standards of the people helping you with that future. One of the most important questions that you can ask of any financial “adviser” is, “Do you have my best interest in mind?” You know something…that question may be harder to answer than you think.
I have spoken before about distinguishing between a fiduciary and a broker. An investment adviser is a fiduciary who is legally obligated to act in the best interest of his or her clients, while a broker only must act in a way that is “suitable” for his or her clients. The line between the two has become a bit clearer after the recent termination of a team of top advisers at Merrill Lynch. Their termination was based on allegations that these advisers recommended that clients invest in products and funds offered by other brokerage houses, other than Merrill Lynch. Their firm’s policy and FINRA rules prohibit these brokers from selling securities without permission from their firm, or processing them outside of their brokerage house’s platform.
In other words, even if investing in a platform not offered by your broker’s platform is in your best interest, your broker may be prohibited from recommending that for you.
Hmmmm…let’s think about that all-important question you must ask your adviser/broker: “Do you have my best interest in mind?”
Well, a broker might want to act in your best interest, but might not be permitted to because his or her loyalties ultimately must lie with the brokerage house for which he or she works. So another question that must be asked is, “Who does a broker work for?” Well…who do you think?
Let me give you a comparison. Let’s say you are looking to buy a new car. As you know, there is an almost endless variety of options to choose from. You need a car that can transport your three kids and their sports gear, gets good gas mileage, and has an automatic transmission. These basic requirements are met by dozens of car models, but there are likely only a few that are the best for you.
Think of a broker as being a car salesman. Obviously, if you go to a Dodge dealer, that salesman will not be able to recommend a Toyota. If he or she has a Dodge vehicle that meets your requirements and is suitable for you, he or she is under no obligation to recommend you go to a different dealer, right? A “broker” could send you off the lot with a two-door Dodge pickup truck that seats five, which would be suitable for your needs. But what happens if you have all the kids’ sports equipment in the back of the pickup and it rains? Does “suitable” work in this situation?
On the other hand, a “fiduciary” would be required to recommend those vehicles that are best for you, choosing from any model, brand, and company available. He or she may recommend an SUV from Toyota, or a Mazda hatchback, or a Chrysler minivan.
The issue that many face is that it is difficult to distinguish between a pickup truck and a minivan, or an SUV and sports car when it comes to investments.
What clouds the issue even more is the difficulty in distinguishing not just between investment options, but between the “dealers” as well. Many brokers are dually licensed as investment advisers, but are not legally held to that standard if their investment advice is only “incidental to their business as a broker.”A recent article from Investment News highlighted the issue by saying, “If financial professionals present themselves as advisers when it’s convenient to do so—on business cards and in marketing—but then don’t uphold the position’s fiduciary responsibility, the distinction is muddled and everyone loses.”
The author of that article proposes a solution to the confusion, suggesting that brokers include a two-sentence disclosure stating, “I am a broker, and my primary obligation is to my firm. I will do the best I can for you within that structure.” How is that for transparency and full disclosure?
I don’t mean to suggest that brokers are bad people; it is just that they are constrained to their particular business model and most investors do not understand it. But investors need to be aware of this truth.
So I urge you, Cutter Family Finances readers, to be vigilant and to stay alert, because you deserve more than “what is suitable.” You deserve the best, don’t you?