With the final hours of 2014 counting down, it seems like an appropriate time to offer my nomination for the most optimistic occurrence of the past year: the first signs that the mainstream financial media is beginning to "get" the fiduciary advisor issue. To wit, I offer two stories—one that appeared in the New York Times; the other, in Forbes—that do the best jobs I've yet seen of helping retail investors to understand the difference between fiduciary and non-fiduciary financial advisors.
The first, written by Tara Siegel Bernard, appeared in The New York Times on Oct. 10. In this story, Bernard recounts the experience of an elderly couple who bought a very expensive variable annuity through their bank (4% annual fee; 7% surrender charge) and "now question whether they were given financial advice that was truly in their best interests."
Here's how Bernard describes their situation: "Brokers, like those at the Toffels' bank, are technically known as registered representatives. They are required only to recommend 'suitable' investments based on an investor's personal situation — their age, investment goals, time horizon and appetite for risk, among other things. "Suitable" may sound like an adequate standard, but there's a hitch: It can mean that a broker isn't required to put a customer's interests before his own…There are some specific situations when brokers must act as fiduciaries — for example, when they collect a percentage of total assets to manage an investment account, or when they are given full control of an investor's account. But under current rules, a broker can take off his fiduciary hat and recommend merely "suitable" investments for the same customer's other buckets of money. Confusing? Absolutely."
To complete her point, Bernard quotes Arthur Laby, a professor at the Rutgers School of Law and former assistant general counsel at the SEC: "Many people think that they are getting that kind of advice when they are not. Brokerage customers are, in a certain sense, deceived. If brokers continue to call themselves advisers and advertise advisory services, customers believe they are receiving objective advice that is in their best interest. In many cases, however, they are not."
She also does a nice job of illuminating the situation with CFPs: "Investors can't simply accept an adviser's title at face value. For example, certified financial planners, a professional designation with some of the more rigorous curriculum and experience requirements, pledge to put their customers' interests ahead of their own when providing advice — and can lose their designation if they don't. But even they do not have to act as fiduciaries if they are just selling an investment without including any advice…"
Finally, following a very clear articulation of the differences between registered reps and RIAs, she offers this advice: "Be sure to ask: Because some people giving financial advice are dually registered as brokers and investment advisers, ask them which hat they are wearing — and whether they are acting as fiduciaries. Then get it in writing."
Then on Dec. 18, Forbes writer Laura Shin posted The Most Important Question to Ask Your Financial Advisor. "Whether you already have a financial advisor or are now looking to hire one, you want someone who has your best financial interest at heart… … But other than asking an advisor to look directly into your eyes and pinky swear that he'll always do what's best for you, how can you find the best person to help you achieve your financial goals?" she asks. Her answer comes in the form of "a primer on all the terms you need to know, the slippery terms that sound like one thing but mean another, and the most important request to make of your current and any potential advisor."
