Wall Street is sending millions of dollars to lobbyists who make sure the money ends up in the right Washington pockets—those of the politicians who sit on committees that regulate the financial service industry. Much of the money is being used to delay and dilute the impact of the Dodd-Frank act, which adds new regulations. But a second, lesser-known battle is being waged to defeat attempts by the Labor Department and the SEC to create fiduciary standards and increased disclosure for stockbrokers. If your current advisor is already a financial fiduciary, this won’t affect you. But if you don’t know the fiduciary status of your advisor, this is a battle to which you should be paying attention.
The Fiduciary Advisor
Federal regulations are crystal clear: A financial fiduciary must do what is best for you at all times. Registered with the SEC or a state financial board, he or she is required by law to put your financial interests ahead of his or her own. Fiduciary is the highest ethical standard in the financial service industry.
The Silent Majority
A non-fiduciary advisor is a stockbroker, a seller of financial products who is not bound to prioritize your financial interests—he or she can instead recommend what is “suitable” for your economic situation, a much looser standard. According to industry estimates, some 80 to 85 percent of financial advisors are not fiduciaries. Yet non-fiduciary advisors are legally permitted to call themselves anything they want—financial planner, financial advisor, whatever. And non-fiduciaries have good reason to muddy the waters: According to a survey commissioned by my firm, 93 percent of investors don’t want non-fiduciaries investing their assets. Yet non-fiduciaries do not have any mandatory disclosure requirements. It’s up to you to ask the right questions.
The Fight Club
Before signing an agreement with a financial advisor, have your attorney review the document. He or she will likely remind you that any dispute with an advisor is required to be resolved by mandatory arbitration under the exclusive jurisdiction of FINRA, the Financial Industry Regulatory Authority. FINRA is a self-regulatory organization funded by Wall Street firms—which is to say, the people who arbitrate your gripe with Wall Street are also funded by Wall Street. Whether there’s a connection or not, FINRA’s own statistics show that 75 percent of such disputes are resolved in the advisor’s favor. But your odds improve significantly if your advisor is an acknowledged financial fiduciary.
The Cost of Free Advice
Why would Wall Street fight fiduciary standards that benefit clients? The industry argument is that wealthy clients subsidize “free” advice to everyone else—a curious argument, given the commissions non-fiduciaries typically charge for sales of financial products—and the fiduciary standard would force advisors to drop millions of small accounts. But the message is really this: If we can’t stick it to small investors, we don’t want ’em as clients.
Of course, it’s not only small clients who get hurt by non-fiduciaries. I’ve seen plenty of wealthy investors who didn’t realize that their advisor was not a fiduciary and were stunned to discover that their advisor had no legal requirement to prioritize the client’s financial well-being over their own.
Defend Yourself
The influence of Wall Street seems too widespread, too focused and too well funded for investors to win on Capitol Hill. So you have to protect your own financial interests by asking the right questions. Require a potential financial advisor to acknowledge his or her fiduciary status in writing. If he or she cannot or will not do so, terminate the relationship and find one who will.
