It’s time Americans realize that the proper investment policy to follow is the same one advocated by most big financial houses and the Securities and Exchange Commission. It goes like this: Cover your rear.
An effort to make your broker act like a “fiduciary” – meaning he has a responsibility to put your best interests first – seemed close to becoming a reality just a year ago, and was even something the SEC was calling for.
Now it appears dead as the SEC feels a compelling need to protect its image rather than your best interests.
The heart of the rule is this: Someone selling you advice or counsel has a responsibility to act in your best interests, while someone selling you investment products need only find things that are “suitable” for you.
The difference basically separates most financial planners from brokers. The planner receives percentage of assets (or a flat fee) for portfolio management, while the broker is paid by transaction fees and commissions. The difference becomes clearer when you consider that both types of adviser could decide that a client would be best served by owning, say, a variable annuity. The fiduciary would have to sell the client a version with low costs – and low fees – while the broker could sell a higher-priced product, or one that they have special incentives to sell.
The brokerage community has fought this legislation tooth and nail, which makes little sense when you consider that many brokers – the bulk of the Merrill Lynch population, for example – already operate on a fee-only basis. That only confuses the issue; a consumer can find brokers who essentially function as planners but who are held to a lesser standard.
The SEC called for new rules but never voted to change them. Now the agency is studying how much the change would cost the industry. Alas, it has no idea how much it costs consumers who lose out in cases where they get advice that’s suitable, but not in their best interests.
The SEC’s focus now stems from an unrelated case about an unrelated issue. An appeals court decision overturned a SEC rule because it contended that the agency had not done a thorough review of the rule’s potential costs. Since the agency doesn’t want to make rules only to see them overturned, it’s not going to make rules without cost figured in.
In short, regulators are covering their backside, and some parts of the financial industry can use the suitability standard to cover themselves if certain actions aren’t in a customer’s best interests.
When you hear financial- services industry types say things about how the proposed rules are being taken from “a different business model” and applied to brokerage houses, it should make you very nervous, because the cornerstone of virtually any business model is “Put the customer first” or “The customer is always right.” The brokerage community appears to be admitting that it operates to a different standard. And that means consumers need to work with a different standard too.
Mind you, the vast majority of financial advisers and brokers are honest, hard-working folks. They’re not always right and the stock market may not always make their solutions look brilliant, but their mistakes are honest.
Plenty of people believe no one can take better care of their money than they can themselves, and that’s true provided you are educated and involved enough to make informed choices on your own.
If you need help, however, you should turn to an adviser. No matter how good the overall quality of the typical broker, it’s time for every broker to suffer for the arrogance of the community they work in, and to be forced to put you first.
Start by asking any prospective adviser if they have a fiduciary responsibility to you; if not, you might want to stop the discussions right there.
But if they persuade you to continue the discussions, keep in mind that you have to look out for yourself. Only you can keep your legal options open, so that if you are sold a bill of goods that blows up and robs you of your nest egg, no one can get away with saying that what they peddled you was “suitable.”
For the average consumer, that means keeping a plain vanilla portfolio. If you’re working with a broker, stay away from “sophisticated” investment products — the kind no one buys without a sales pitch — and go back to the most simple of principles: If you don’t understand it, don’t buy it.
Much as I hate to say it, before handing over your money to anyone you must now think “What’s my legal recourse if this goes awry?” If you feel you would have none – because the sales pitch sounded “suitable” – think twice about who you’re doing business with.
If you want those more complex products, only buy them from a fiduciary; don’t even sit through the sales pitch with someone who operates on the suitability standard.
The financial-services business is going to keep this fight going, and the SEC lacks the nerve to stand up to the same special interests that seem to have Congress in their pocket on the subject. The only way to show the brokerage community the error of its ways is to work exclusively with advisers who pledge – and have a legal responsibility – to put your best interests first.
Clearly, dealings with anyone who doesn’t follow a fiduciary standard are at your own risk, and that’s exactly how the broker-dealer community wants it. You should want something better.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.
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