NEWS: Law-Makers Consider New Standards for Financial Advisers

The Wall Street Journal's SmartMoney site recently featured an article (posted below) about proper standards for financial advisers. At issue is whether advisers should be free to sell their clients any "suitable" investment option (and perhaps claim a larger commission at their expense), or should be fiduciaries for their clients--agents legally required to act in their clients' financial interests.

Although most young people are not yet hiring financial advisers, there are a few questions to keep in mind if you plan on hiring one in the coming years, or even in the long-term, as changes proposed now could stick around until our generation hits retirement planning:


First, you should ask yourself what incentives your advisor has to get you to act in a certain way. It might even make sense to ask your adviser directly to explain their interests in your investments. For example, if your adviser takes a certain percentage cut of transactions that you make, then their interest could be in your making more deals than you otherwise should.

On the other hand, if your adviser charges a flat fee regardless of how many transactions you make, then they likely won't be pushing investment opportunities on you for their mere profit. They could, however, offer you fewer opportunities than you should otherwise take so that their work is less for the same flat pay-out.

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The conclusion of this analysis is simple: It is hard, if not impossible, to imagine a financial adviser without some vested interest in your undertaking certain behaviors.

That fact does not mean that you should avoid all financial advisers, nor does it mean that you should do the opposite of what they suggest; it does, however, mean that you should reflect critically about your advisers' interests and consider whether they are pushing an option for their own benefit, or because it truly is the best option.

Second, when considering an adviser, you should ask what their legal obligation is to their clients. Although the potential changes would require financial advisers to act as fiduciaries, the practice is not prohibited in the status quo. Some advisers do opt to serve as fiduciaries (in return, likely, for higher fees), and you can seek out these advisers if that is your preference.

There are certainly pros and cons to the fiduciary model, and it is unclear whether one is better across the board. Because of that uncertainty, you should consider the factors that matter to you--knowing that the advice is in your 'best interest' vs. constraining the adviser from certain risks because of legal liability--and evaluate how you value them. You currently have the freedom to choose either model--fiduciary or a standard adviser--and you should exercise that freedom to make the best decision for yourself. Without knowing your adviser's rules, however, choosing correctly is far more difficult.

Here is the post in its entirety (credit SmartMoney's Matthew Heimer):

One of the wonkiest debates in retirement planning is arguably also one of the most important. It’s about whether financial advisers who sell IRAs should be required to follow the so-called fiduciary standard. A fiduciary is required to act in a client’s best financial interests; someone who doesn’t follow the standard can sell a client almost any investment product that’s “suitable”—even if it’s expensive, or if selling it earns the adviser a fat commission.

Opponents of the fiduciary standard say that it would generate red tape and liability issues that would make the system more expensive for consumers. And recently, that side of the debate got some valuable support, in the form of a third-party study that concluded that retirement-account clients whose advisers followed the fiduciary standard were already paying as much as 70% more than their peers. The report has had a lot of influence in Washington, D.C. policy circles. But as SmartMoney.com’s Ian Salisbury reports today, it includes some notable flaws in its methodology—and consumer advocates aren’t pleased.

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