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Brokers Come Under Fire as the Fight Over Fiduciary Financial Advice Heats Up Again

The seemingly endless debate about the standards of care with which various types of financial advisors are legally required to treat their clients received some much-needed attention in Congress recently.  Although the Department of Labor's fiduciary rule was struck down in court about a year ago, Labor Secretary Alexander Acosta told lawmakers last week that the DOL hasn't abandoned the issue.  Given that the SEC and DOL are both working on new rules governing the relationship between advisors and clients, it's critical for current and prospective consumers of financial advisory services to understand the regulatory environment and to be aware of recent developments.

As a refresher on the issue, advisors working at registered investment advisory firms like Five Seasons have a fiduciary obligation to clients, a legal duty to put client interests first and foremost.  In contrast, brokers and insurance salespeople must simply make sure the products they recommend are "suitable" for the client. This may seem like semantics, but in practice this lower suitability standard provides the opportunity for financial salespeople to push unnecessarily expensive products for their own benefit, rather than the client's.

The damage being done to the nation's retirement readiness by the suitability standard finally received some much-needed attention during the last administration.  In a speech, President Obama expressed his concern about this issue:

"There are a lot of very fine financial advisers out there, but there are also financial advisers who receive backdoor payments or hidden fees for steering people into bad retirement investments that have high fees and low returns.  So what happens is these payments, these inducements incentivize the broker to make recommendations that generate the best returns for them, but not necessarily the best returns for you."

As a result, Obama directed the Dept. of Labor to work on regulation requiring brokers who provide advice to retirement plan accounts to adhere to the much tougher fiduciary standard.  The SEC, as it has been for years, was debating a similar rule for brokers working with retail investors.

The former President's speech drove the fiduciary debate to a new level of intensity.  To add fuel to the fire, NYC comptroller Mark Stringer at the time proposed a new state law requiring all brokers and financial salespeople to disclaim the following at the beginning of every customer agreement, and to recite it throughout the engagement and in advertising:

I am not a fiduciary.  Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected returns for you.

Harsh, but fair.

And even the legal profession chimed in on the fiduciary debate.  The Public Investors Arbitration Bar Association (PIABA), a group of lawyers who represent investors in securities arbitration and litigation proceedings, accused the brokerage industry of misleading investors through false advertising.

The lawyers accused nine brokerage firms of giving the impression in their advertising that they have a fiduciary obligation to put clients' interests first, but when investors' complaints go to arbitration the firms argue they have no fiduciary responsibility to clients.  The brokers singled out by the PIABA include Merrill Lynch, Fidelity Investments, Ameriprise, Wells Fargo, Morgan Stanley and UBS.

To learn more about this topic, which is so imperative to understand for both existing clients of the brokerage industry and for prospective consumers of financial advisory services, please click on The Fight Over Fiduciary Financial Advice , or contact Five Seasons Financial Planning to schedule an introductory meeting.


About the Author

Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT.  His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.  To contact Paul, please click here.