How to Tell if Your Broker is Looking Out for Your Best Interest

Find out how much financial advice you’ll really get.


Is your broker looking out for your best interest? A recent study by data and marketing company Infogroup found that three quarters of respondents believe their broker is required to put their clients' interests first. Unfortunately, that is not the case. Most advisors are not required to adhere to that prerequisite at all.

There are actually two paths an advisor can take when entering the industry: become a commissioned broker and simply follow a "suitability" standard for clients. Or he or she can study, take another exam, be permitted to charge a fee, and have a "fiduciary" responsibility for the advice they give. Let's examine each path.

A suitability requirement simply means that the broker must know about his or her client's situation, know their investing time horizon, and make an estimate about their risk tolerance. This is only required at the time of sale of the investment recommended. There is no ongoing advice. Think of this scenario as your broker being a salesman. When he sells the product, he gets paid a commission. Don't get me wrong, this could be great advice, but in most cases the advice stops after the sale.

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A fiduciary requirement incorporates the above, but to a greater degree. In this case, the advisor must truly know his client, choose the appropriate investments required to fulfill that client's needs, and continually monitor his situation. In fact, that advisor must meet with clients at least one time per year. Typically, this advisor charges an annual fee, often a percentage of the amount of money he is managing for his client (maybe 1 to 1.5 percent per year.)

Because of the disconnect between what the public thinks and what is actually happening in the broker/client relationship, Congress has put forth legislation that could require all financial advisors to become fiduciaries. That could include all brokers and even insurance agents.

That sounds good, doesn't it? Think of it: All financial advisors would have to put their clients' interests first and have a requirement to meet with them once per year.

Here's the problem. Many brokers are not positioned to deliver. They do not have the systems in place to monitor investments, meet with clients annually, or even track their clients' goals and objectives. This could be game-changing for their practice and they would have to make serious alterations. They would likely have to rethink their service model and possibly begin to only work with wealthy clients.

[See The Three Most Important Retirement Questions.]

The ultimate outcome would be that the small to mid-size investor, who needs advice just as much as the wealthy, would have trouble finding good solid investment advice. That would be tragic.

Still, I believe it's good that the financial industry is being shaken up. Financial professionals are being asked to rethink their priorities and put the clients first. That alone provides great value for everyone. I don't believe there will be an across-the-board change, but I think that the proposed changes, although they may be smaller than anticipated, will provide benefits to all investors.

Kelly Campbell, Certified Financial Planner and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, A Registered Investment Advisor in Fairfax, Va. Campbell is also the author of Fire Your Broker, a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.