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Confused About Financial Advisers? You’re Not Alone
The business of financial advice has, for investors, always been confusing and opaque. New rules are unlikely to help clear up the situation.
Financial representatives of different stripes in recent decades have adopted generic titles like “financial adviser” and “wealth manager,” obfuscating the differences in their practices and obligations to clients. Brokerage firms eschew the title “broker” for their ranks, in part because regulatory efforts in recent years spotlighted the differences between the investment advisers who are supposed to act as fiduciaries and brokers and insurance agents who don’t have to.
For those looking to hire a financial adviser, it can be hard to decipher who’s who. Different types of advisers have varying fees and conflicts of interest, and for decades they have been held to different regulatory standards. But often those differences are buried in the fine print.
On June 5, the Securities and Exchange Commission passed a set of regulations, together dubbed Regulation Best Interest, meant to improve quality and transparency in the financial-advice business. The rules are supposed to help clarify what kind of relationship a client has with their financial adviser and what conflicts the representative has.
Instead, the new rules may make things more blurry, consumer advocates say. Critics also say the rules conflate “best interest” with “fiduciary,” which now have different meanings even though it sounds to consumers like the same thing.
It is increasingly tough to tell a broker from an investment adviser because most—60%, according to the SEC—are registered as both and regularly switch hats. Bound by a fiduciary duty, investment advisers give ongoing advice and are required to put clients’ interests before their own when they recommend investments. Brokers typically buy and sell stocks, bonds and other products, earning commissions as they transact. They aren’t required to act as fiduciaries.
An assistant professor of finance at Western Kentucky University says the SEC’s new rules permit brokers to state that they act in customers’ best interest while still recommending products that pay the brokers more so long as they disclose the conflict. Supporters of the best-interest rule say it is based on fiduciary principles that are tailored to brokers, who can be cheaper for investors who don’t want to pay for ongoing financial advice.
Lawyers and consumer advocates say that for decades, many investment advisers have erred on the side of caution and avoided conflicts that pitted them against clients. Rick Fleming, the SEC’s on-staff investor advocate, said the new interpretation “weakens the existing fiduciary standard by suggesting that liability for nearly all conflicts can be avoided through disclosure.” He added that this isn’t what an investor would reasonably expect from a fiduciary, and it isn’t how investment advisers view and market themselves.
How a client pays has been one way to determine whether a financial professional is acting as a broker or an investment adviser. The new rules make it more important to know all the pieces, consumer advocates say, which aren’t always obvious and may vary by account type. While fee-only (as opposed to fee-based) advisers are typically fiduciaries, investors should find out if they receive third-party payments from fund companies or other compensation that could affect advice.
© 2015 Mutual Fund Observer. All rights reserved.
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