Clients won't care if you don't

Surprise, surprise: 85% of full-service investment firms' clients have never heard of, nor do they understand, the difference between the suitability standard followed by brokers and the fiduciary standard followed by registered investment advisers, according to a J.D. Power & Associates survey. As a story last week in InvestmentNews noted, investors don't seem very concerned about the different standards. In fact, there seems to be a fair amount of confusion among investors over the meaning of “fiduciary standard.” Some 42% of respondents to the survey said the fact that their financial advisers adhere to fiduciary standards reduces their level of comfort. But why would they be concerned, and why would they not be confused, if no one has ever explained the difference between the two standards and explained what a fiduciary standard is? Most investors probably assume that their brokers or investment advisers are providing them with the best advice for their particular situation — that is, that they are receiving objective information, untainted by the self-interests of the person providing it. They might have reacted differently if they understood that brokers are required only to ensure that suggested investments are suitable for the clients and that the brokers can consider their own interests (e.g., the size of their commissions), while registered investment advisers must offer advice solely in the interests of the clients.

DOUBLE STANDARD?

It's not even clear whether Rep. Barney Frank, D-Mass., understands the implications of a fiduciary standard versus a suitability standard. While the Dodd-Frank financial reform law gave the Securities and Exchange Commission the authority to impose a fiduciary duty on broker-dealers that is “no less stringent” than that required of investment advisers, in a May 31 letter to SEC Chairman Mary Schapiro, he appeared to say the SEC should be careful not to foist the investment adviser standard onto brokers. Huh? A fiduciary standard for brokers should be “no less stringent” than the investment adviser standard but shouldn't be the same? This suggests some confusion in Mr. Frank's mind and implies that he would accept two different fiduciary standards. The low level of knowledge on the part of investors is not an excuse to allow the two different standards to continue. It is a reason to improve efforts to educate investors about the implications of the existing two standards and to consolidate them. When dealing with clients — particularly prospective clients — financial planners and investment advisers often fail to differentiate their roles and responsibilities. Even more, they fail to distinguish their business models from those of brokers. The resulting confusion on the part of investors has left them vulnerable to higher-than-necessary fees, unnecessary services, unsuitable investments and even fraud. The financial services industry should inform the amateur investor of the different roles played by financial planners, investment advisers, life insurance professionals and broker-dealers. Where confusion exists, there lies the opportunity for scoundrels to take advantage.