I just returned from an amazing ski trip in France. My father-in-law has wanted to ski the Alps for the better part of four decades, and this year we made it happen. It was great to enjoy time with family and to meet fellow skiers from around the world. But I was struck by an encounter with a group who had “won” the eight day ski trip for free by signing up investment clients. This wasn’t their first such trip, either, as they had been highly successful in “bringing in assets.”
While I can’t rightfully judge the quality of the investment advice they provide or condemn their true motivations, I had just watched The Big Short on the airplane and I couldn’t help but jump to a single, pointed question: how is this seriously still a thing?
The Fiduciary Standard
The question is obviously tongue-in-cheek, but I think its answer deserves a real discussion. It comes down to the fiduciary standard of care, a fancy phrase that means that a financial advisor must act solely in the client’s best interest when offering advice, placing the client’s interest above the advisor’s.
Today, there are two distinct groups of people giving financial advice in the US: investment advisors and broker-dealers. These two groups are regulated by different sets of laws. Registered investment advisors (like us) must provide services to clients under the fiduciary standard. Certified Financial Planners™ are also held to this responsibility by the CFP Board.
The laws for broker-dealers are a little different. Notably, they omit the fiduciary standard language. In its place is something called the suitability standard of care, which requires that broker-dealers reasonably believe that their recommendation is “suitable” for a client. It’s a subtle difference: basically, the advice needs to be in the client’s interest, but not necessarily in the client’s best interest.
That one word creates a huge margin of error. It means that brokers can recommend their proprietary funds over third parties, recommend funds that pay them higher commissions, and favor investment products or custodians that offer perks – like trips – in return for sending business their way.
Demanding the Best
The logic is rooted in something nicknamed the Merrill Rule, in which the SEC exempted broker-dealers from fiduciary duty because the advice they gave was essentially deemed to be “incidental” to their primary business of selling investment products.
And this may have been fine back when people had “stock brokers,” but now everyone has a “financial advisor” thanks to some serious rebranding campaigns at the big brokerage houses. And I would argue that the expectations of these clients have shifted without the responsibility on the brokers shifting in tandem.
Admittedly, I stand to gain from the movement away from brokers towards registered investment advisors, but this is neither an indictment nor accusation against the brokerage community, which includes many individuals I both respect and admire. If you have an amazing broker whom you trust and enjoy working with, that shouldn’t be dismissed. I just want to encourage you to ask some questions.
The power is in your hands to demand the best for your family and your money. Please know that any advisor out there worth your trust will not shy away from talking about conflicts of interest and compensation. Ask to see it in writing. Here are some tips if you don’t know where to start.