Updating Financial Advisor Standards

Is your financial professional putting your needs first?

In the financial services industry, there’s no shortage of people calling themselves financial advisors. Unfortunately, anyone can call themselves a financial advisor, which can be highly misleading and confusing.

According to AARP, there are more than 400,000 people in the U.S. that call themselves financial advisors – using a number of so-called professional designations to sell financial products and give advice.

Not all financial advisors are created equal and the quality of financial advice you receive can vary widely.

A financial professionals title does little to tell you how qualified they are to provide you with the most objective financial recommendations that are in your best interest.

On February 23, the White House announced plans to move forward with new regulations that would require fiduciary standards for financial advisors and brokers who provide advice or investments to retirement plans or those saving for retirement. The U.S. Department of Labor (DOL) first proposed rules to protect consumers from financial advisors who financially benefit from recommending certain investments by holding them under fiduciary duty in 2010.  The proposed rules were delayed for further review until this year.

Fiduciary vs. Suitability Standards

The fiduciary standard – putting the clients’ interests first – does not currently apply to stockbrokers and other financial salespeople who are not Registered Investment Advisors.

As a general rule, financial advisors fall into two categories:

  1. Brokers, who are registered under the Securities Act of 1934.
  2. Investment advisers, who are registered under the Investment Advisers Act of 1940 (“IAA”).

Investment advisors are subject to higher standards of regulation and licensing than brokers, and accordingly, investment advisors owe higher duties of care to their clients.

While brokers are subject to the Financial Industry Regulatory Authority (FINRA) “suitability” rule, investment advisors are subject to that rule, plus a full fiduciary standard of care.

At issue in the new rules is the definition of “investment advice.”The Department of Labor wants anyone who advises investors on their retirement funds to have to meet the standard of a fiduciary -meaning they MUST put the client’s needs above their own.

Fiduciary Standard: In addition to being obligated to put clients’ interest ahead of their own, fiduciaries must also adhere to the duties of loyalty and care. An investment adviser, subject to fiduciary standards, is required to provide up-front disclosures to the client before any contracts are signed to provide investment advice. The disclosures cover important topics such as qualifications, services provided, compensation, range of fees, record of disciplinary actions and possible conflicts of interest.

Suitability Standard: Brokers often have many different titles: wealth manager, wealth adviser, investment consultant, financial adviser, and registered representative. Because a broker is only required to establish suitability, he/she is not legally obligated to put your best interests ahead of their own. The suitability standard can mean that investments are simply appropriate for a client’s investing objectives, age and risk tolerance. Many argue the suitability standard invites conflicts of interest pertaining to compensation, sales goals or other incentives that encourage them to push financial products that are not best for clients.

report released by the White Houses Council of Economic Advisors provides a breakdown of the issue and argues that investors lose as much as $17 billion annually in retirement dollars—or “at least” 5% to 10% of their retirement savings over 30 years—because of “excessive fees” and “conflicted” advice.

Adverse Effects on Proposed Fiduciary Rules

The financial industry disputes the White House report and says the pending rules could have unintended consequences that could limit access to financial planning for those without significant portfolios and make professional advice more expensive.

The Securities Industry and Financial Markets Association (SIFMA) says the new regulation could reduce investor choice, cause inconsistencies as different regulators would apply different standards to the same retirement accounts, prohibit access to investor guidance, and raise the costs of saving for retirement.

Ken Bentsen, president and chief executive of the Securities Industry and Financial Markets Association, which represents Wall Street firms and smaller brokerage firms, said the memo sought to question the entire brokerage industry and seemed to ignore other regulators already in place. He is also concerned that the requirements would be so strict that firms would choose not to offer the type of accounts regulated by them.

Questions to Ask a Financial Advisor

If you’re searching for someone qualified to provide well-rounded retirement investing advice, while keeping costs down, the Department of Labor suggests asking your financial professional the following: Do you consider yourself a fiduciary?

  • If not, why not?
  • Are you willing to act as a fiduciary with a duty to act solely on my behalf?
  • Are you willing to disclose to me any conflicts of interest that may interfere with your acting solely on my behalf?
  • Are you willing to put this commitment in writing?

How are you compensated?

  • Do you earn fees or commissions based on the number of products that I buy or the size of my investment?
  • Will you earn a higher fee or other type of compensation if I invest in certain products you recommend or will you receive fees for services related to specific investment products?
  • Will you provide a list of the fees and commissions you receive either directly from me or from other sources in writing?

 Are you a licensed or registered investment adviser?

  • Are you registered with the State, U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), or the Certified Financial Planner Board of Standards, Inc. (CFP Board)?
  • For how long? What is your experience?
  • Who supervises you, or, are you a sole practitioner?
  • If a sole practitioner, do you have professional liability insurance?
  • Have you (or your firm) ever been disciplined? For what?

The details of the rule proposal are being ironed out, but it’s anticipated that the Department of Labor will publish their recommendations on a uniform fiduciary standard later this year.

Do you think all financial professionals providing retirement advice and products should be held under a fiduciary standard?

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