The world of restaurants is a lot like the financial advice industry. In one category are traditional brokers, many with conflicted, murky compensation practices—like restaurants with no letter grade. In the other category is a smaller but growing group of Registered Investment Advisors (RIAs), including AdvicePeriod, who are legal fiduciaries—the group proudly hanging an “A” in the window. Fiduciaries are bound by law to serve clients’ best interests.
Unfortunately, it is not that easy to tell which financial professionals are on your side—after all, they don’t actually come with letter grades or other clear labels. What’s more, brokers often muddy the water by calling themselves “advisors,” “consultants” or “planners”—anything but “brokers.” Yet brokers and fiduciaries are as different as those two restaurants.
Just like car salesmen and real estate agents, investment brokers earn commissions for each sale they make. And they face constant temptation to steer clients toward the products with the fattest payouts—that’s just human nature. AdvicePeriod’s preference is to charge our clients a fixed fee—freeing us to offer advice that is in our clients’ best interest, with no economic horse in the race.
Brokers are regulated by their own industry, which does limit them to selling “suitable” products. But the suitability standard leaves plenty of room for conflicted behavior, as a 2012 study by the National Bureau of Economic Research made clear.
In the study, hired actors asked brokers to evaluate portfolios that the researchers had created. The brokers routinely recommended changes, even to solid portfolios not in need of change. And they pushed high-cost mutual funds over lower-cost index funds. Do you think a broker’s advice is impacted by how they get paid?
Unfortunately, consumers are frequently not aware of the material differences between brokers and fiduciaries. We often hear, “But surely a broker is required to inform their clients of potential conflicts of interest.” No, they’re not. Brokers are not required to disclose information to their clients which highlights important conflicts of interest and would empower a client to make the best decision.
On the other hand, fiduciaries, such as RIAs, are legally required by federal and state governments to put clients’ interests ahead of their own. Crazy notion, right? They must do what is in their clients’ best interest. As a client, you should not accept anything less.
Fiduciary advisors face far fewer conflicts than brokers because they sell advice, not products, and charge fixed fees rather than sales commissions. Should a conflict of interest arise, fiduciary advisors are required to disclose it promptly and clearly. Not so with brokers.
Lately, the federal government has been championing the fiduciary standard. In early April, the Department of Labor (DOL) attempted to expand the application of the standard. Meanwhile, the Securities and Exchange Commission is seeking to bring brokers under the same strict standards that govern RIAs.
To the surprise of no one, the brokerage industry is fighting these efforts tooth and nail—so the outcome is up in the air. Thanks to the broker’s powerful lobbying efforts, the DOL ruling was a watered down and marginally useful expansion of the standard with the potential to cause more harm to consumers than good. The government’s inability or unwillingness to make the fiduciary standard the only acceptable practice is hard to fathom.
As a result, it’s consumers, along with the professionals who counsel them, who can make the biggest impact. Reserve your patronage for fiduciary advisors who are truly on your side.[/fullwidth_text]