There is a great deal of heated discussion about the Department of Labor’s proposal to require a fiduciary standard for anyone providing investment advice on qualified retirement plan accounts. Some claim that investors lose millions each year on investments made under different standards such as the suitability standard applicable to most brokers. Others claim that millions of consumers – affluent but not high net worth – will not be able to obtain professional advice on their accounts if a fiduciary standard is applied to all such advice.
Looking at the situation from a different perspective, it might be useful to understand three things. First, anyone who is going to collect money for recommending particular investments is almost certainly going to have a financial stake in what the investor chooses. It may be overt and direct, as where the adviser or broker collects a commission on the sale. It may be indirect, as where the adviser will collect a fee on the investor’s assets the adviser manages. Either way there is a financial stake. Although the mere existence of this stake does not preclude the broker or adviser from putting the investor’s best interests first, that stake is a conflict.
Second, no matter how much disclosure is required or provided for investment recommendations made to investors, brokers and advisers know that the investors almost never will read through the disclosures let alone understand them. Further, it is not unknown for brokers and advisers to fail to disclose potential conflicts or sources of income or other benefits to the provider of investment advice. Bottom line, disclosures should be made and should be accurate but everyone should understand that this does not provide adequate protection to either the investor or the broker/adviser.
Third, what is really important in the relationship between the investor and the broker or adviser is the working together to get the investor to attain his or her financial goals. Understanding what those goals are and offering clear options for the investor to choose from in order to reach them is what really matters to both parties. The broker or adviser should be fairly compensated for his or her advice to the investor just as the investor should get personalized, professional advice. Obviously, this does not mean that the adviser or broker recommends the same investments to every investor since each situation is different.
In sum, when we are talking about investors and their advisers/brokers, there is always going to be a conflict of interest between them and no amount of disclosure can remove that fact. However, where the investor and his or her broker/adviser are honest and open with one another and work together to the common end of helping the investor reach his or her goals, then we are where we need to be no matter what we call the standard applied.