After a two-hour discussion last week with a group of financial planners about exactly whose interest comes first – the advisor’s, a broker’s, or your interests as a consumer – I came away more confused than ever. If I’m in a muddle, I’m guessing you are, too.
To recap: A broker must recommend investments that are suitable for you. No wild and crazy investments for conservative folks who’ll need their money tomorrow.
An investment advisor has to recommend what’s best for you, no matter whether this recommendation will make money for the advisor.
A broker has a suitability standard. An investment advisor must be a fiduciary, putting your interests first.
As an example, if the right investment for you is a Standard & Poors 500 index fund, the broker can sell you one that his firm offers for a sales charge of 3 percent. The investment advisor looks around and finds one that has a sales charge of less than a third of one percent. The broker may know the cheaper index fund is out there, but he gets a bigger commission by selling you the expensive index fund. You're getting what's suitable, but not what's best. Because by paying the higher fee, you have less money to invest.
This not-too-clear line got more blurry in recent years when the Securities and Exchange Commission gave brokers a loophole. Brokers would not have to follow the same rules as investment advisors and could offer financial planning and investment advice, so long as it was only incidental to their main business of being brokers. Brokers could be planners but not fiduciaries. Got it?
The Financial Planning Association got sick and tired of that, filed a suit and not long ago won. The broker loophole was struck down.
The SEC says it won’t challenge that court decision. But it might make some new rules, maybe this summer.
In the meantime, it’s more important than ever to protect yourself when you are going into a relationship with a financial advisor. Always ask, Are you a fiduciary? All the time or only in some situations? If a broker asks you to change from one sort of account to another, ask the reason why. Examine the fees and see which way the money goes.
As a journalist, I use the Watergate adage: Follow the money. Only when you know how the advisor is paid will you be able to figure out the advisor’s motivations.
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