Posted By: CFP&WM On: Dec 30th, 2009 In: Financial planning Investing My soap box

Legislature Does Not Protect Investors

Congress is reportedly attempting to improve the safeguards for the investing public. Sweeping financial services reform legislation was approved last week in the House of Representatives. But there were some evidently last minute changes inserted into the bill by lobbyists to benefit big Wall Street Broker Dealers such as Charles Schwab.

Registered Investment Advisors give investment advice and they have a fiduciary duty to always do what’s in the best interest of the client. Broker dealer representatives are not responsible to do what’s best for the client and operate at a lower standard of what is called “suitability”. They only have to do what is suitable for the client, not what is best.

Some financial advisors are registered as both investment advisors that operate under the fiduciary duty and also representatives of the broker dealer and operate under the lower suitability standards. These double licensed individuals change from the White hat of investment advisor to the Black hat of the salesman. It is impossible for clients to know which hat the advisor is wearing and whether they are getting advice or being sold a bill of goods.

It was the Security and Exchange Commission’s recommendation that all individuals who give financial advice should operate with the client’s best interest in mind at all times. The head of the committee that produced the bill, Barney Frank, agreed that investors should be projected by the fiduciary standard.

So how is it that the House of Representatives passes legislation, if enacted, would require the Securities and Exchange Commission to write rules that would establish a fiduciary duty for brokers to provide investment advice but the bill adds a qualifier to that requirement saying,” nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing the personalized investment advice about securities.”

Consider the example. You go to a financial adviser and pay a fee to analyze your investments. As a result of the analysis, it is recommended that you buy $10,000 of an emerging market fund, $15,000 of a small value fund and $25,000 of an intermediate bond fund. Ideally the advisor then would present the best, lowest cost funds of each type. However this legislation would allow the adviser at take off his “fiduciary duty hat” and put on his “suitability hat’. The salesman is then free to sell his company’s high priced funds in each of the general categories.

This provision that was inserted, with virtually no one knowing about it, would render the fiduciary duty of brokers useless and therefore the public would have no safeguards, as was the intent of the Securities and Exchange Commission recommendations.

This is yet another example of how money from Wall Street goes into the lobby industry’s pocket to influence legislation that is not in the best interest of the public but is in the best interest of Wall Street.

If you as an individual want objective unbiased investment advice that is always in your best interest, it is essential that you seek advice only from Registered Investment Advisors that are not representatives of a Broker Dealer.

The simple test is to call your advisor and ask if they are a “representative of a broker dealer”. If they say yes, you have the wrong advisor.

For list of fee-only advisors check the website for the National Association of Personal Financial Advisors (NAPFA) or Garrett Planning Network.

Michael Chamberlain CFP®
Ca Registered Investment Advisor

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This article is for informational purposes and should not be taken as legal, tax or investment advice.

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