Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

What Wall Street Doesn't Want You to Know About Fiduciaries


How proposed financial reform legislation could impact investors.

Editor's Note: Welcome to Savvy Money, a new personal finance column written by John Wasik. This column will appear on Monday mornings on Minyanville.

Buried deep within the morass of financial reform legislation is a proposal to require that brokers and financial advisers be fiduciaries. My safe bet is that it won't make it into the final version of the bill.

Despite what Wall Street is telling you, this is a vitally important word if you want to invest without getting scorched.

This one word triggered an onslaught of lobbying on behalf of financial planners, registered investment advisers, brokers, and insurance agents.

Fiduciaries are required by law to act in your best financial interest and can be sued if they don't. Brokers, or any commissioned representative for that matter, generally fall under looser, less investor-friendly "suitability" standards. When you sign up with an adviser who's also a broker, you give up the right to sue and submit to mandatory arbitration if there's a dispute.

The distinction between a fiduciary and a broker is simple. The broker mainly owes his allegiance to the company and is generally compensated by selling you financial products. A fiduciary's model is typically to place the client's best interests before their own and they typically don't charge a commission.

Current laws give you little guidance and protection. Chances are, your financial adviser is not a fiduciary. There are more than 630,000 registered representatives in the US, brokering everything from mutual funds to variable annuities. Among the biggest brokerage houses in the US are Merrill Lynch (BAC), Wells Fargo (WFC), and Morgan Stanley Smith Barney, which is owned by Morgan Stanley (MS) and Citigroup (C). The vast majority of the folks at these firms are broker-dealers who are paid commissions on certain products they sell.

Registered investment advisers and certified financial planners, in contrast, are nearly all fiduciaries. Since there's only about 60,000 authorized certified financial planners and about 11,000 registered investment advisers, you really have to search them out.

Will Washington protect Main Street or cave to Wall Street? The House version of the bill, which has already passed, delved into the fiduciary question in some detail. It laid out definitions as to who should be a fiduciary and attempted to bring many financial advisers under that umbrella.

But it's less clear what the Senate will do. Senate Banking Committee Chairman Christopher Dodd's original template for reform took up the fiduciary issue, but it has since withered as the financial services lobbyists worked against it. Banks, brokers, and insurers are generally against making their representatives fiduciaries. Not only would it involve more training, it would create more liability for them if their customers are sold unsuitable products.

Seeing what they were up against, a small coalition of registered investment advisers and certified financial planners, who are mostly fiduciaries, backed off a campaign on the issue. Dodd, who is retiring after this term, has been at the center of the reform firestorm and hasn't been able to reach a consensus with Republicans.

Of course, the fiduciary model is not a perfect one -- after all, Bernard Madoff was supposed to be a fiduciary -- but investors are more likely to get less-conflicted, more comprehensive service from a fiduciary adviser.

It pays to vet any adviser before you invest. First, check their disciplinary background through the BrokerCheck service. For those professionals who are registered investment advisers, you can also check their records through your state securities agency. If you want to get a detailed picture that may reveal potential conflicts, request their Form ADV. Make sure to ask for parts one and two (particularly schedule F) to discover any compensation practices that may hurt you.

John Wasik is the author of The Audacity of Help: Obama's Economic Plan and the Remaking of America.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos