Sidestep This Financial Regulatory Loophole

These days, pretty much every financial services provider claims to put a client’s interests first. It’s great advertising. It’s also shamelessly misleading.

Long-time personal finance author, Jane Bryant Quinn, sets the record straight in a recent blog post. She writes:

Senator Tim Johnson socked investors with what might be a knockout punch, during negotiations on the financial reform bill last week. Johnson, known as the “senator from Citibank,” habitually sides with the financial industry and against consumers. He’s the only Democrat who opposed last year’s legislation to curb credit card abuses.

A South Dakota Democrat, Johnson laughs at the concept of “fiduciary duty” — the idea that people who advise you on investments should put your financial interests ahead of their own.

At present, Registered Investment Advisers have a fiduciary duty toward you and your money. But there’s an exception for stockbrokers and insurance agents. They can—and do—advise you to buy financial products that benefit themselves more than they benefit you.

For example, it’s okay for them to offer you high-cost mutual funds when low-cost funds are available that invest the same way. It’s okay for them to sell you a high-cost, out-of-state 529 college savings plan when your own state’s plan costs less and gives you a tax deduction, too.

Johnson’s aggressive language might yet be watered down, but brokers and insurance agents won’t have to change their ways anytime soon.

Few consumers really understand what it means for a provider to put a client’s interests first. Try it, ask a friend or neighbor. Invariably they‘ll argue convincingly that their broker or insurance agent does precisely that.

How many of those people would also, at one time, have insisted that their mortgage broker was putting their interests first when he/she sold them a sub-prime or hybrid mortgage that now they can’t afford? How unfortunate…and preventable. We need to wake up!

Ms. Quinn’s examples of fiduciary duty, or lack thereof, make the concept easy to comprehend and recognize in practice. Being familiar with them can not only save you money…it can make you money. Read her full article here: Investor Protection Gets Knocked Out of the Financial Reform Law

Get Your Investment Advisor to Work for You

Your physician recommends that you undergo surgery or your attorney outlines a sensitive legal strategy. Regardless of whether it’s your health or serious complications with the law in question, most would agree that there is a lot riding on the advice we receive and the decisions we make based on it.

Since the point of going to the doctor/lawyer in the first place was to seek expert advice, short of seeking a second opinion, the trust we place in them usually sways us to accept their proposals. We believe them to be more expert than us and trust them to have our best interests at heart. Doctors and lawyers and others serve in the role of fiduciary which means to put their patient or client’s best interests ahead of their own. Without this fundamental precept, no rational person would agree to put themselves at risk.

This begs the question then as to why so many people entrust their financial well-being to a non-fiduciary; a financial professional who is not obligated (or required) to act in their best interest? The most likely answer, it seems to me, is that too many people are simply unaware of the fiduciary distinction in financial services. They mistakenly give their financial professional the benefit of the doubt based on a personal referral or some other vote of confidence. Unfortunately, this seemingly innocent omission can, and often does, lead to serious consequences.

According to Barbara Roper, director of investor protection at the Consumer Federation of America, “The average investor would be appalled to see how hard some members of the financial industry are working to avoid acting in the best interests of their clients.”

Doug Holthaus of the Cincinnati Enquirer points out that a little-publicized item in the financial reform bill currently moving through Congress would require anyone who offers investment advice to act in the best interest of their client. “That there’s a need to actually legislate this says a lot about the state of the investment business today,” he said.

So, what is the investing public to do? Simple. Take 5 minutes to become more aware. Holthaus provides a clear, concise description of the differences between investment fiduciaries and non-fiduciaries. Reading his article, Get Your Investment Advisor To Work For You, won’t guarantee success, but it could be your first, best step in the right direction.

Do you think Congress should pass legislation that mandates a fiduciary standard for all investment professionals? If Congress doesn’t pass such legislation, are you more or less likely to hire an investment fiduciary to manage your money?