Does Your Financial Advisor Have Your Back?

Guardian.com Article on American Investment Advisors.  {Excerpt with my highlights.}


Whose side is your financial adviser on, anyway?

Does your financial adviser have a legal duty to give advice that's in your best interests? The chances are that you think the answer to this question is "yes."  Chances are, you're wrong.

Not everyone who gives you financial advice has a duty to actually help you. The technical term for the true helpers is 'fiduciaries.' That means it's their legal duty to always put their client's best interests ahead of their own.

Two sets of regulators – the Labor Department and the Securities and Exchange Commission – have been examining what kinds of financial consultants should count as fiduciaries. Is your stockbroker a fiduciary? Is your financial adviser?........

Chalk it up to Washington's reliable ability to confuse the best interests of the financial services industry with that of the 315m-plus Americans who need protection in everything from college savings strategies to retirement planning.

The problem, as it always is, is money. The financial services industry wants to protect the fees it receives from selling financial products to people who sometimes have no good reason to be buying them. A fiduciary should be able to tell you that you don't need to buy something – but the financial services industry wants to make room for people who can sell you things with very little thought for what they might do to your finances.

There are some financial helpers who are fiduciaries already. That includes certified financial planners and Registered Investment Advisors – usually known as RIAs. Their job description includes warning you away from any financial cliffs. Unfortunately, these people are a small part of the financial advice world – they make up less than 20% of the universe.

When most of us go looking for help with our investments, whether we go to the bank or the friendly professional we first heard about via a commercial on CNBC, we encounter people who call themselves financial advisers. That's a fancy word for a salesman.  These salesmen are not fiduciaries, but they do need to adhere to something called the suitability standard........

....It gets better. The financial services industry has been arguing that they should not be subject to the fiduciary standard as it is currently written; they believe that if they are forced to act in the best interests of their clients, they will not be able to give advice while making a profit.

....No matter how many well-meant personal finance articles are published, most consumers have no sense of what is in their financial best interests. Not only are those unsophisticated investors likely to fall victim to a persuasive technique, they are unlikely to ever figure out they received less-than-ideal advice – until, that is, real damage is done.

Think about it for a moment. We don't ask patients to wonder if their doctors are recommending one sort of treatment over another because they have a financial stake in it. In fact, if a doctor recommended a second-tier treatment because she had a financial stake in it and it turned out badly for the patient, it's unlikely a jury hearing a malpractice case would be sympathetic to the defense that the treatment was suitable enough.

But when it comes to financial advice, well, good luck to you. We somehow expect everyone to be an instant expert at exotic financial instruments.....

How much Congressional enthusiasm is there for this? Well, a bill was recently introduced into Congress that would force the Department of Labor to wait until the SEC announces its changes to the fiduciary standard. That would effectively stop the process for quite some time into the future. The proposed legislation's name? The delightfully Orwellian "Retail Investor Protection Act."

Only in Washington would protecting the consumer really mean protecting the financial services industry.

My Comment:  Lumen Capital Management, LLC is a Registered Investment Advisor with the State of Illinois.  Our only compensation is via our management fees that we charge quarterly to clients.  We make no money from commissions, soft dollar arrangements or from the sale of any investment or product.  Like the family attorney of old, our time and advice are our stock in trade.

Link:  Guardian.com:  Whose Side is Your Financial Advisor on?