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.