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Who's on Your Side?

Friday, June 9 quietly marked an historic day in the financial services world.  As of that date, all financial advisors are required to forego any sales agenda and give advice that would benefit their clients or customers—or, if they decide otherwise, to explain how and why they intend to give advice that instead primarily benefits themselves and their brokerage company.  This rule only pertains to rollovers from a qualified plan like a 401(k) into an IRA, and to the investment recommendations for that IRA account.  But it may be a first step toward something larger.

The polls consistently show that most Americans believe they already receive objective advice—called “fiduciary” advice by the profession and regulators.  But the overwhelming odds are that they don’t.  There are half a million brokers who earn commissions if they can convince you to buy an expensive alternative to the thriftier, better-performing investment options on the market.  That’s more than ten times the number of advisors who adhere to a fiduciary standard.  Government research estimates that consumers lost $17 billion a year to conflicted advice in the recommendations made by brokers and sales agents posing as advisors related to retirement plans.  This, to put it bluntly, helps explain why so many Wall Street brokers are insulted if their annual bonus is in the low seven figures.

The number of real fiduciary advisors may actually be lower than this discouraging figure.  A mystery shopper study in the Boston area found that only 2.4% of the “advisors” (most were almost certainly brokers) it surveyed made what most would consider to be fiduciary recommendations.  On the other side, 85% advocated switching out of a thrifty portfolio with excellent funds into something a bit more self-serving.

An article in the most broker-friendly publication imaginable—Bloomberg—recently outlined some of the ways that you can be taken in by a sales pitch and never know it.  It notes that the brokerage industry—that is, the larger Wall Street firms, independent broker-dealer organizations and life insurance organizations—repeatedly fought the fiduciary rule in court, arguing, in some cases, that their brokers and insurance agents shouldn’t be held to this standard because, despite what they said or what the companies’ marketing materials proclaimed, they were nothing more than salespeople trying to effect a sale.  The courts refused to block the rule.

It gets worse.  Even though brokers are held to a sales standard—they are required to “know their customer” and to make investment recommendations that would be “suitable” to somebody in your circumstances (a very low standard that is appropriately known as “compliance”), a new study found that 8% of all brokers have a record of serious misconduct, and nearly half of those were kept on at their firms even after getting caught.

We don’t know how long this regulation will be in effect.  New Labor Secretary Alexander Acosta has announced that he’s studying whether the rule that requires brokers to act in the best interests of their customers is good or bad for customers, and his comments hint that he thinks you would be harmed if suddenly you were able to trust the advice you receive.  But there is one simple way to determine whether you’re working with somebody you can trust.

First, ask your advisor directly to provide written documentation that he or she will act in your best interests.  This should be no longer than a page and might be no longer than a sentence or two.  There’s even a “Fiduciary Oath” that many financial advisors are giving to their clients—without any prompting.  If the broker hems and haws, then hold onto your wallet or purse, because chances are any recommendations you receive are going to cost you money that will be disclosed in the fine print of whatever agreement you sign, somewhere after page 79.

By Bob Veres, publisher of Inside Information - the premier publication of financial industry trends and information for leading practitioners in the financial planning profession.