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Plan Well, Retire Well

Saving and investing your money

Investment advisers, brokers, and the consumer: What does it mean to be a fiduciary?


The issue of fiduciary responsibility has been a hot topic for some time, and it looks like that will continue. In 2007, the Financial Planning Association (FPA) sued the Securities and Exchange Commission (SEC) over a rule that was commonly known as the Merrill Lynch Rule. This rule allowed brokers to provide investment advice without being required to meet the same standards required of investment advisers. The FPA won. But what does that mean?

The Investment Adviser Act of 1940 requires that investment advisers meet a fiduciary standard. A fiduciary must put the interests of the client first. In other words, they must recommend the investment that is the best for you. But a broker only has to meet a lower standard, the suitability standard. They must recommend only investments that are suitable for you. They can consider their own interests in determining which investment to sell you. So it's legally OK for a broker to choose exactly which mutual fund to sell you based on whether she will earn a higher commission, a prize, or the favor of her supervisor by selling that particular fund to you.

When brokers were allowed to provide investment advice but were not required to be fiduciaries, things got pretty confusing for consumers. Unless you were really well-informed, you probably had no idea whether that person was really looking out for your interests or not.

So the FPA sued the SEC and won. Now, brokers shouldn't provide investment advice or be able to portray themselves as investment advisers. They should be paid via commission, and not by a fee for advice. And they shouldn't be able to switch hats, calling themselves a broker (technically, a registered representative) at one time and an investment advisers at another.

But now the game has changed. FINRA (the Financial Industry Regulatory Authority, which is not a governmental agency but a self-regulatory body which licenses and regulates brokers) and the SEC, which regulates most* investment advisers, are now engaged in a new discussion about the legal definition of fiduciary. NAPFA, the FPA, and the Certified Financial Board of Standards have formed a coalition to give input on this discussion, hoping to keep the fiduciary standard at its current, stringent definition.

As an educator whose goal is to help you make wise decisions when you choose financial advisers, I sincerely hope the outcome will be clear guidelines that consumers can understand. Consumers need to know 1) exactly what services they can expect from a given type of financial professional, and 2) to whom their financial adviser owes their allegiance. Stay tuned to see how this unfolds!

Want to know more? Check out our website, Choosing a Financial Professional. Follow this issue in the news. And make your voice heard with your elected officials.

And let me know what you think about this. Click on my name below to send me an email.

*The others are regulated by state securities agencies and are held to the same standards as those registered with the SEC.



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