Roger Wohlner
Within the financial services world, there is a major debate that has been going on for the past several years. The issue is whether or not those who hold themselves out as financial advisers should be required to adhere to a fiduciary standard in all dealings with clients.
Essentially, a fiduciary is required to put the interests of his clients first. Registered Investment Advisers (RIAs) are required to take this approach. Members of NAPFA, the largest professional organization of fee-only financial advisers (I am a member), and most other fee-only advisers adhere to this standard well (the majority of these advisers are RIAs). The Financial Planning Coalition, which is an alliance between NAPFA, The CFP Board, and the Financial Planning Association, is taking the lead in trying to move the fiduciary standard forward.
On the other side are the insurance companies and the brokerage firms. Brokers and registered reps are required to follow the suitability standard. While they must ensure that the investment product is suitable for the client, the standard of care, including the costs and fees associated with the product, is far less rigorous. These groups are well-funded and for the most part opposed to the adoption of a rigorous fiduciary standard for all.
Currently, brokers are regulated by FINRA, which requires them to make recommendations that are suitable for their clients. I’ve never come across a good definition of what suitable really means. One definition I found on the website of a law firm:
The suitability rule provides that when a financial representative recommends to an investor the purchase, sale or exchange of any security, a financial representative shall have reasonable grounds for believing that the recommendation is suitable for such investor upon the basis of the facts, if any, disclosed by such investor as to his or her other security holdings and as to his or her financial situation and needs.
This really doesn’t specify anything about loyalty to the client, disclosure, or anything else. The word reasonable is quite vague in my opinion.
As a consumer of financial advice, you should absolutely care about this issue. While I’m not saying that there are not plenty of brokers and registered reps who care deeply about their clients and who do put their clients first, why not make this an absolute requirement for all who hold themselves out as financial advisers?
To be fair, the fiduciary standard or any similar rule does not provide an absolute guarantee of honesty and integrity. NAPFA has been stung by at least four instances of former members (including two former presidents of the organization) who have been accused and/or indicted in connection with malfeasance in dealing with their clients. In addition, a well-known fiduciary advocate was recently accused of pilfering funds from several retirement plans for which he served as a designated plan fiduciary. The fiduciary standard is unfortunately not a failsafe measure against the worst aspects of human nature.
That said, with this type of standard and expectation of care as a starting point, the bar will be raised to a higher level for advisers in their dealings with their clients.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Read more about Roger here.
Reader Comments Read all comments (2)
Roger Wohlner of IL 12:30PM April 18, 2012
Betsy MacBride of VA 9:46AM April 18, 2012