When you seek advice, you expect professionals to do their best for you. The surgeon shouldn’t recommend an unnecessary operation just so he can make some money. Even if there’s a healthy fee involved, a lawyer should advise against a lawsuit you have no chance of winning.
Right? Well, you hope so, anyway. What about your financial advisers? Will they give you the advice that’s best for you, or that’s most profitable for them?
Ask most brokers, accountants or other advisers and they’ll say the customer’s interests come first. But the financial services industry has long opposed proposals to make a “fiduciary standard” legally binding.
Today, for example, stock brokers generally have to meet a less rigid “suitability standard.” That means a broker should not urge a 70-something retiree to take a major risk and bet everything on stock options or pork bellies.
But it leaves lots of room for the broker to recommend things that are not really the best deal the investor could get. A broker, or an advisor working for a mutual fund company, is free to recommend his firm’s mutual funds even if competitors have comparable ones with lower fees and better performance.
Mary Schapiro, chairman of the Securities and Exchange Commission, wants to make the stronger fiduciary standard uniform among various types of advisers who currently live under different rules, some more rigorous than others. The financial-reform bill gives the SEC authority to tighten standards after a six-month study period.
Opponents are sure to argue that current rules and market forces are good enough. After all, advisers have to look after customers’ interests or customers will go elsewhere. But the industry’s critics note there are plenty of examples of advisers who put their own interests first. Why else would advisers recommend their firms' funds when another fund is cheaper?
Even if the SEC eventually imposes tougher rules, investors will need to be on guard, pinning advisers down with close questioning.
Anyone seeking financial advice, for example, should make sure that the adviser really has the appropriate expertise. A stock broker may be good at recommending stocks, bonds and mutual funds but may not have much expertise in estate planning or tax issues.
The customer should always know what the adviser will charge and how those fees are figured. And the customer should be on the lookout for ways in which the advice may serve the adviser’s interests.
A broker who earns money through commissions, for example, has a financial incentive to recommend lots of trades. An adviser who charges an annual fee based on the size of the customer’s account can make money without actually doing very much.
Customers should always be wary of advisers who push in-house products, such as funds that have heavy upfront sales commissions, or “loads.” And, of course, it pays to be especially cautious if the adviser pushes you to make a spur-of-the-moment decision.
And it’s perfectly reasonable to dump an adviser who doesn’t return your phone calls within a few hours.
Finally, it pays to steer clear of advisers who want authority to buy and sell in your account without getting your approval before each move. Most small investors do best with a long-term buy-and-hold strategy, so there’s rarely a need to move fast. Advisers who want wide-ranging authority over your account are trying to wriggle free of their most important duty: to make a solid case that every move is in your best interest, not their best interest.
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