Is Your Broker’s Recommendation in your Best Interest?

By Bob Brooks
February 25, 2015

Well of course your broker/advisor has your best interest at heart….right?  Aren’t there laws that protect the individual investor?  Well, actually, not really.  It depends on the type of advisor.

To understand the level of protection you have as an investor, you have to understand two standards.  There are fiduciary responsibility and suitability standards.  The fiduciary standard is the highest standard for an advisor and carries the highest responsibility.  This states that the advisor is required to do what is right for the client.  Securities regulations states that advisors who are part of Registered Investment Advisory firms (fee based firms) are fiduciaries for their clients.   

Commissioned brokers/advisors are not required to meet that standard.  They are only required to make recommendations that are considered suitable.  Suitability is a much easier standard to obtain.  This is where the rub comes. 

Take for example Jack and his client Bill.  Investment Product A and Investment Product B are both suitable for Bill.  Jack, the investment advisor, makes 7% on investment Product B and only 3% on Investment Product A.  Jack knows that the fees are lower on Investment Product A and that the return probability is better.  Yet, he convinces himself that Investment B is better and he gets the higher commission.  Since both investment products are suitable and since Jack doesn’t have fiduciary standards to meet, the only thing keeping Jack from the higher commissions is his conscience versus a requirement.

To be fair, suitability standards do weed out some transactions that are clearly in the best interest of the advisor versus the client.  This is not to say that commissioned advisors are inherently bad and recommending products based on commission size.  Unfortunately, when introducing these higher commission products to advisors, the industry does a pretty good job of convincing the advisor community that they are doing the right thing and getting paid handsomely for doing so.  It removes the need for the advisor to go through the ethical Q and A in their mind.  You commissioned based advisor that you want is one that holds themselves to fiduciary standards even though the law does not require it.  Fortunately, there are many out there who do. 

So what is the moral of the story?  First, investors need to be aware of these two standards.  Second, this just emphasizes that investors need to be extremely careful with who they select to help them on the journey of investing. 

Regulators are currently fighting with the industry to change the rules and make ALL advisors fall under the fiduciary standard.  However, as long as the industry has deep pockets and lobbyists in the pockets of lawmakers, it is going to be an uphill fight. 

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