Financial reform still lets advisers put themselves first
Posted on 22 March 2010
By Mark Miller
Permanent URL of this article: http://retirementrevised.com/money/financial-reform-still-lets-advisers-put-themselves-first
The financial services reform package introduced last week by Senator Chris Dodd (D-Connecticut) drops one of the most important consumer protection measures for retirement investors: a rule requiring that all financial advisers put clients’ interests ahead of all else and avoid conflicts of interest.
What-you thought advisers already had to do? Not necessarily.
There are two types of financial advisers: those who, by law, work for clients and have fiduciary responsibility and those who don’t.
The ones with fiduciary responsibility are Registered Investment Advisors. They usually are independent or work for small firms and they’re regulated by the Securities and Exchange Commission (SEC) or by state authorities. (In California, brokers also have fiduciary responsibility.)
Stockbrokers aren’t fiduciaries. Nor are salespeople at banks or insurers. They’re self-regulated by the Financial Industry Regulatory Authority (FINRA), an industry-sponsored group. FINRA requires its reps to recommend investments that are “suitable” for clients-a definition with holes big enough to drive a truck through.
“I’ve tried to find a definition of ‘suitable’ and the best I can find is ‘reasonable,’” says Sheryl Garrett, founder of a network of fee-only advisers that bears her name.
Many investors don’t understand the difference, or don’t care.
Earlier drafts of financial services reform legislation would have subjected brokers to fiduciary standards and the SEC would have had the power to ban compensation practices rewarding brokers for anything deemed not in the best interest of clients. But the provision appears to have been drummed out of the bill after intense industry lobbying.
None of this means you can’t get sound advice from a non-fiduciary advisor. But the fiduciary protection would be a meaningful way to help clients sort out the interests of advisers. Here’s hoping the fiduciary provision makes it way back into the bill as it makes its way through Congress.
