Would you support a rule requiring all brokers and other financial professionals to provide advice that’s in an investor’s best interest — not their own?
It may surprise you, but many brokers and their trade associations oppose such a rule.
Advisers who are Registered Investment Advisers, like our firm, are already held to the higher “fiduciary standard.” That means we have to put the client’s best interest ahead of everything else.
But brokers are subject only to the lower “suitability” standards, leading the White House to call for stricter rules for brokers and other non-fiduciary individuals who advise investors on their investment strategy.
“Believe it or not, the great majority of financial advisers are not fiduciaries,” says Peter Mallouk, author of The 5 Mistakes Every Investor Makes and How to Avoid Them: Getting Investing Right.
Here’s how the The Wall Street Journal explained the rule changes proposed by the White House:
“Under current rules, brokers’ recommendations have only to be “suitable” for clients, a weaker standard that critics say permits high fees that compound over time and eat into investors’ returns. The Obama administration has said “conflicted” advice costs retirees as much as 1 percentage point in lower annual returns on retirement savings.”
Unfortunately, most investors are completely unaware that Registered Investment Advisers and brokers are regulated differently and are subject to different legal standards.
And “suitability” does not ensure you get the objective advice you deserve. Here’s how Eileen Ambrose – writing for AARP – explains the difference:
“What’s “suitable” is not necessarily what’s best for you. Take, for example, two mutual funds that fit your financial needs, or in other words, could be considered suitable. One is low-cost while the other comes with a steep sales commission and high annual fees that erode the return on your investment. Under current rules, brokers are under no obligation to recommend the first fund. Instead, they can advise you to invest in the one that makes them or their investment firm the most money.”
The Takeaway: Make sure you ask your advisor whether he or she acts as a fiduciary when providing you with investment advice. Only a fiduciary must put your interests first.