Customers Want The Best Advice – Not Only Suitable Advice

Although most investors falsely assume registered representatives are required to provide advice and recommendations in their best interest, momentum is gaining to turn this myth into fact.

Currently advisers are only required to adhere to a suitability standard of care which means they must advise “suitable” investments pertaining to clients’ objectives, income level and age – but not necessarily the best investment for the client.  

A fiduciary standard ensures the adviser will advise the best options for the client, and always put the client’s interest before the advisers’.  It also requires investment advisers to provide up-front disclosures about their qualifications, what services they provide, how they are compensated, possible conflicts of interest, and whether they have any record of disciplinary actions against them.

For example, if the broker has a choice of two similar mutual funds for a client’s account, they are currently able to sell the one that’s twice as expensive as the other (often meaning a larger commission for the broker). If a fiduciary standard is implemented, it would require the broker to sell the client the mutual fund sold at the best deal for the client.

Under the Dodd-Frank Law, the SEC conducted a study to review and analyze the need for enhanced examination and enforcement resources for investment advisers. In January 2011, the SEC submitted a study to Congress that recommended that the agency enact a universal fiduciary duty in order to protect investors who are confused about the differing advice standards.

According to the J.D. Power and Associates 2011 U.S. Full Service Investor Satisfaction Study 85% of investors either have not heard or do not understand the difference between a suitability standard and a fiduciary standard.

Increased attention is being directed to the issue.  On June 23, The Financial Planning Coalition (FPC) submitted a letter to the SEC, accompanied by a petition signed by more than 5,200 financial planners, urging the SEC to apply all fiduciary standards to anyone providing personalized investment advice to retail clients.

The House Financial Services Committee is expected to hold a hearing on the fiduciary-duty report in the next upcoming months; however the SEC has said it will not move on a fiduciary-duty rule until later this year.

A report by The RAND Institute for Civil Justice in 2008 found that 63% of investors believe registered representatives are already required to act in the best interests of the client, and 70% believe that registered representatives must disclose any conflicts of interest. The fact is they don’t – yet.