For anyone who follows the financial services industry, last week was a rather historic one. In case you missed it, on April 6 the U.S. Department of Labor unveiled a long-anticipated, and long overdue, rule that will require financial advisors to adhere to a fiduciary standard when helping clients choose investments for their retirement accounts. In a nutshell, this means that in the future financial advisors will be required to help customers pick investments for their 401(k)s and IRAs that are in the customer’s best interests rather than abiding by the much squishier “suitability” standard that has long been in place.
By now you may be thinking, “Wait a minute. You mean my financial advisor hasn’t been acting in my best interests all along?” Sadly, the answer may be no.
Double Standard: Suitability vs. Fiduciary
The current so-called suitability standard only requires that brokers and financial advisors put their clients in investments that they can reasonably deem suitable for that individual. Unfortunately, this makes it perfectly legal for your financial advisor to recommend you purchase a pricey mutual fund or life insurance product for which he or she receives a big, fat commission, so long as he or she can make the argument that it’s a suitable investment for you. So while your advisor might have a hard time making the case that investing your nest egg in a bitcoin ETF meets the suitability standard, he surely could justify putting you into a high-fee U.S. large-cap stock fund that earns him a nice commission – some might rightly call it a kickback.
The fiduciary standard makes it much more difficult for advisors to put their own interests ahead of yours. One likely outcome of this new rule is that advisors will steer their clients into more low-fee investment offerings such as index funds. However, the new rule does not fully take effect until January 2018, and even then will only apply to retirement accounts, not investments held in a taxable account, for example. In the meantime, one way to protect yourself in all cases is to ask your advisor if he or she is acting as a fiduciary on your behalf, and if the answer is yes, make sure you get it in writing. (This guide from the Department of Labor also can help.)
How We Approach Advisor Due Diligence
Although the new fiduciary rule is a giant step in the right direction for consumers, it won’t eliminate the need to check your advisor’s background before handing over your hard-earned money for him or her to manage. The fact remains that even the strictest financial rules won’t protect you from an unscrupulous operator.
You may think instances of unethical behavior by brokers and financial advisors is relatively rare. But as New York Times columnist Ron Lieber points out in this recent column, it may be more common than you think. Citing one academic study, Lieber writes that 7.3% of all brokers working from 2005 to 2015 had at least one disclosure on their regulatory record for a settled consumer complaint or worse. And it’s not just independent operators who are suspect. The study found that nearly 20% of brokers at Oppenheimer & Co. had disclosed at least one incident of misconduct, and some other national brokerage firms aren’t much better.
Here at Hillard Heintze we conduct hundreds of background investigations on financial advisors for clients each year. All too often we find that people who represent themselves to prospective clients as experienced, successful advisors are exaggerating or even lying about their credentials and background. You’d be surprised how many of these operators hand out business cards with long strings of impressive-sounding acronyms after their names yet have lapsed credentials, or never earned the credential at all. That’s why our due diligence approach for financial advisors includes verification of all of an advisor’s credentials and licensing claims, as well as a review of his or her financial history.
One Fast and Easy Background Check
Even if you don’t have the wherewithal to investigate your advisor’s personal and professional history, the least you can do is to do your own quick background check using FINRA’s BrokerCheck search tool. Anyone selling securities such as stocks, bonds and mutual funds must register with FINRA, the financial industry’s regulatory authority. BrokerCheck can quickly tell you if a broker or financial advisor is currently licensed, his or her employment history, as well as information on disciplinary actions or customer disputes in which he or she has been involved. You can also search on financial institutions themselves to see if complaints have been made against them. The search may not reveal all red-flag information, such as every criminal or civil case the individual or institution has ever been involved in, but it is a great place to start.
BrokerCheck is free to use, as is another FINRA database of disciplinary actions taken against individuals or firms in the financial services industry. Like BrokerCheck, information found there can act as an early warning system, steering you away from a potentially costly mistake.
As I said, the new fiduciary rule should be a great help to investors trying to avoid being taken for a ride by their financial advisors. But it by no means guarantees that your advisor will perform the job ethically and legally. Even after the new rule goes into effect, due diligence will still be required.