A Standard Of Care
Words by: Bryon Gragg
Published July/August 2010
HAVE YOU HAD ONE OF THOSE moments where you realize that you are probably not as exciting as you want to be or used to be? I had one of those recently. The rest of the family had retired to other rooms in the house and I was in front of the TV with a big bag of popcorn watching intently as congressmen grilled Goldman Sachs CEO Lloyd Blankfein on C-SPAN. Later, as I described the hearings to my wife Allison, her expression confirmed it all: I was officially boring.
I found the hearings both interesting and disheartening; one of the reasons was the lack of understanding the Senate committee had regarding Goldman’s interactions with its clients and the standard of care to which it is held. Most investors don’t realize there are two sets of standards of regulating individuals who hold themselves out as investment professionals.
The fiduciary standard, which applies to investment advisors under the Investment Advisers Act of 1940, requires that advisors put the best interests of the client first and foremost. This requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest. Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Probably the most important question you can ask an advisor is, “Do you have a legal obligation to act in my best interests?” Under the fiduciary standard of care, the answer is a simple yes.
Unfortunately, only a small proportion of “financial advisors” are federally- or state-registered Investment Advisors. Most financial advisors are considered “Broker-Dealers” by the United States Securities and Exchange Commission (SEC). They are held to a lower standard of diligence on behalf of their clients. In fact, they are required by federal law to act in the best interest of their employer, not in the best interest of their clients.
This is the suitability standard which covers most brokers, financial consultants, representatives, financial advisors or others who hold themselves out as financial professionals. The suitability standard requires that advisors need only to make recommendations that are “suitable” for the client but not necessarily in the client’s best interest.
Basically, the fiduciary standard separates the professional from the salesperson. The sad part about this is that most of the investing public is unaware there is a difference. A lot of the confusion has been brought about by the brokerage industry itself. You no longer find anyone who will admit to being a stockbroker; now you find financial consultants, financial advisors and a host of other titles which are subject to the suitability standard. As long as their recommendations are “suitable” for your goals and needs, they are free to steer you toward in-house funds, funds that share revenue with the firm or products that pay the highest commission instead of what may actually be the best for you.
You must remember that standards are beneficial only if they are followed. There is no substitute for due diligence on the part of the investor. Visit www.focusonfiduciary.com to download a questionnaire for questions to ask an advisor. Ask the questions, make sure you are getting straight answers and make sure your interests are being placed first and foremost. Remember, it is your money and you deserve to have someone working for you who puts your interests first.