Anyone who says elections don't matter hasn't been paying much attention. The chasm between Republican and Democratic visions is about as wide during this cycle as it's ever been. As always, the outcome will have untold ramifications. One of them could be whether the investment advice you get helps you or hurts you.
Though not apparent to most voters, the financial-services industry has been divided in the past few years by a debate over what's known as the "universal fiduciary standard"—that is, whether people who sell advice and investment products to retail investors should be required to put client interests before their own. There is, after all, a conflict of interests inherent in relations between investors and their broker/advisers: What's good for the client is not necessarily what's most profitable for the person providing the advice. At the very least, unsophisticated investors usually don't know if they're dealing with an adviser who has their best interests at heart, or with a broker looking to sell products and maximize fee income.
Here's a quick review of how adviser responsibilities to investors look today: Registered investment advisers (RIAs) already operate under a fiduciary standard required by the 1940 Investment Advisers Act, backbone of investor protection in the United States and purview of the Securities and Exchange Commission (SEC). But there are plenty of brokers and people who are allowed to call themselves "advisers" who are not RIAs. They are held to the much vaguer "suitability" standard of service—meaning they're obligated to consider what's suitable for their clients, assuming anyone can define what suitable means. Exempted by the 1940 Act, broker/dealers are regulated by the Financial Industry Regulatory Authority (FINRA), a private "self-regulating organization" authorized by the SEC.
This may sound like some angels-on-pinheads distinction important only to lawyers and regulators, but it matters to investors too. Two things have happened over the years that make fiduciary standards critical for everyone. First, you are responsible for your own investments in a way your parents probably weren't. The supplanting of traditional, defined-benefit pensions by defined-contribution plans has transferred investment risk to workers, who are thus reliant on investment advice like never before.
Second, since the 1990s, the roles of broker, dealer, and adviser have become virtually indistinguishable to the average investor, thanks to the evolution of financial services and the rise of "dual registrants"—people registered both as brokers and advisers.
"One of the reasons [the fiduciary issue] is important is that we no longer call broker/dealers broker/dealers," says Barbara Roper, director of investor protection for the Consumer Federation of America and an advocate for a universal fiduciary standard. "We call them financial advisers, and we call the services that they offer retirement planning or investment planning, and they market themselves to customers based on the advice they offer. To the average investor, they look like advisers."
(Retail investors aren't the only ones vulnerable to this conflict of interests. It was large institutional investors—banks, pension funds, insurers—on whose behalf the SEC sued Goldman Sachs in 2010 for allegedly understating the risk of a complex instrument, called a synthetic CDO, that blew up after Goldman sold it to them. Goldman later settled for $550 million.)
Regulators were grappling with the broker/client conflict long before the financial crisis, but the discussion intensified with the lamentable case of one Bernard L. Madoff, a broker/adviser whose interests, it turns out, were not particularly well-aligned with those of his clients. In 2009, the fiduciary issue became part of negotiations over the Dodd-Frank financial reforms, which authorized an SEC study on the effectiveness of existing fiduciary standards in protecting investors.