Financial Planning Blog

The House Financial Services Committee passed the Investor Protection Act earlier this week, moving the legislation on to the full House of Representatives. The issue of whether all so-called "financial advisors" will have a fiduciary duty to their customers has been a hotly debated portion of this bill. Unfortunately, it is an issue that most investors are pretty much unaware of. For more on why you should care about this, read "Is Your Financial Advisor a Fiduciary?" and "The Critical Difference Between a Stockbroker and Registered Investment Advisor".

Although a major portion of the financial services industry (i.e. brokerage firms and insurance companies) has fought it, the proposed legislation extends the fiduciary standard to everyone who advises customers on the purchase of securities. So far, so good. However, seeing that battle lost, the brokerage world is embracing the idea of harmonizing the regulation of brokers and registered investment advisors (fiduciary advisors like Table Rock Financial Planning), and they now seek to weaken the fiduciary standard to something more of their liking. As Barbara Roper, director of the Consumer Federation of America said, "For years they've opposed the fiduciary duty. Now they've embraced it in order to gut it." If they are successful in watering down the standards, investors will lose--again.

Ask yourself, what standard of care do you expect from the person or firm advising you on your investments and other financial issues? Do the following five core principles of the authentic fiduciary standard describe the care you would like to receive from your advisor?

• Put the client's best interest first;
• Act with prudence; that is, with the skill, care, diligence and good judgment of a professional;
• Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts;
• Avoid conflicts of interest; and
• Fully disclose and fairly manage, in the client's favor, unavoidable conflicts.

Why you wouldn't you expect this type of care? There is no compelling reason to expect anything less.

A recent Wall Street Journal article provides a good discussion of the issues. It talks about the changes that a true fiduciary standard would bring to the brokerage world:

The changes could transform the brokerage industry by changing the way products are sold and marketed and even how brokers are paid. Requiring brokers to operate under the existing fiduciary standard could force them to recommend more investments that are less costly and more tax-efficient. They would have to tell clients about any potential conflicts of interest, such as when they stand to gain personally by favoring one product over another. For example, a broker who recommends a mutual fund with a higher fee -- and one he gets a bigger commission for selling -- would have to disclose that potential conflict upfront.

These sound like good changes to me. However, these changes will make it more difficult for brokers to move dollars from the investors' pockets into their own. Maybe that's why they are so reluctant to embrace a true fiduciary standard.