Requiring Your Own Standard Is Just Common Sense

7128261_sI know I’ve written articles in the past about the pending fiduciary rules floating over the financial industry but these discussions are not going away.
A recent proposal from the Department of Labor would require all financial industry professionals to put the best interests of their clients ahead of their own, even if it means less money in the professionals’ pockets. For example, brokers would be required to recommend the best product for their clients, rather than one that is merely suitable for their clients’ needs.
There are plenty of critics of this proposal who have voiced concerns over the effect that this proposed rule would have as it is currently written. At its core, the proposal is designed to add a level of transparency to what can be considered a pretty convoluted industry. All financial advisors, for instance, will be required to disclose fees and conflicts of interest in ways that they are not currently required to. The concern is that if all brokers and advisors must conform to these rules, the options available to investors will be limited.
Prior to engaging in a discussion of the merits of changing the industry, it is important to understand how the different sectors of the industry are regulated. MarketWatch has done a good job putting together a chart mapping out this structure and how the industry is currently broken down by regulatory standard.
One issue with the proposed rule is that, as written, brokerage firms will have trouble complying with what is considered a complex set of guidelines, so much so that they may not bother working with individual investors on small accounts. Furthermore, those investors that they do work with may pay higher fees to make the extra effort worth it to those firms. Unfortunately, this may leave small investors on their own with their investment accounts, which is obviously not the aim of this bill.
With that being said, we can likely count on adjustments being made to this proposal before this fiduciary standard becomes a requirement. Although a specific decision has yet to be made, many financial professionals feel that the proposal alone should have a powerful effect on the industry. Why is this? It has to do with that little tagline I leave you with each week: Be vigilant and stay alert.
Through Cutter Family Finance, Susan and I try to take complicated financial issues and break them down to help those who are not familiar with them understand those issues. But ultimately it is on you, as investors, to stay educated and do your research when it comes to finding a financial advisor that is right for you. I know that seems like common sense, right? Well unfortunately, it is not and ultimately, we must uncover what standard a financial advisor is working from. As I tell my kids it is all about standards and you are who you hang out with. I tell them, don’t hang out with chickens if you want to soar with eagles! So when Susan and I meet with investors we talk them through a list of about a dozen questions they can ask to help them understand whether their advisor is acting in their clients’ best interests. I want to highlight a few of them here for you.
One of the most straightforward questions you can ask a financial professional is whether he or she is an advisor with a fiduciary responsibility under the 1940 Act. And if not, why not? And if not, then is he or she a Series 7 or Series 6 Registered Representative who does not currently have a fiduciary responsibility to his or her clients. This discussion will get to the core of whether or not they are legally held to a fiduciary standard.
We also suggest asking about an advisor’s fee structure. Most retail/individual investors access the markets through the retail brokerage system, either by going directly to the large brokerage houses, or to a broker affiliated with a brokerage house. A broker’s primary job is to close the transaction between you and the brokerage house. For their services, brokers are paid a commission, which is often based on both the amount of product that they sell and the kind of investment they are offering.
To dive further into the commissions discussion, ask the advisor how, if he or she is paid up-front on commissions, he or she has a vested interest in growing and monitoring your portfolio.
Susan and I are going to continue to keep an eye on the Department of Labor’s proposal, and you should as well, but we always tell people that it’s best to take things into your own hands. Whether the law requires a financial advisor to act in your best interest or not, shouldn’t you require that your financial advisor to act in your best interest? Of course, you should . . . that’s just common sense.