brokers, IRAs and the fiduciary standard

a fiduciary

Being a fiduciary basically means putting your client’s financial interest ahead of your own.

A practical example:  

…given the choice between two products, one with a checkered performance record and high costs, but which makes payments (cash or trips or dinners…) to a financial adviser for selling the product, and a second with stellar performance and lower costs, and which makes no such payments, a fiduciary is required to recommend the second over the first.  At the very least, the fiduciary is required to disclose the facts of the situation, including the payoff from product #1, and allow the client to choose.

A brokerage firm registered representative, on the other hand, is not a fiduciary.  So he’s not required to alert the customer in advance if he’s recommending an inferior product, which is ok, but not great for the client and which–oh, by the way–pays him more.

For a long time consumer advocates have been trying to get Congress to change the laws so that brokers are redefined as fiduciaries.  Their push has intensified since the financial crisis.  But, although the change seems to me to be just common sense, and is in line with the standard of service customers already assume they are receiving, the financial industry lobby is still strong enough to have stymied these efforts.

retirement funds

The Labor Department, however, has recently used its administrative authority to issue guidelines for retirement investments which require advisers to act as fiduciaries, that is, to give investment advice that is in the client’s best interest.

Today, I heard the first reaction to these guidelines–other than general disapproval–from the brokerage industry.  According to the Wall Street Journal, the Edward Jones brokerage firm is withdrawing its mutual funds from retirement products affected by the Labor Department rules.  I looked on the Edward Jones website for clarification, but there’s no press release I can find.

To me, this means one of two things:

–EJ thinks its business practices run afoul of DOL guidelines and it is choosing to withdraw from this market rather than change them, and/or

–it thinks that 401k/IRA providers that sell Edward Jones products have potential compliance issues and prefers not to be involved.

Either way, this all seems to me evidence of how reliant the traditional brokerage profit model must be to offering investment “advice” that can’t pass the fiduciary test.

 

 

One response

  1. Pingback: What stocks to invest in = brokers, IRAs and the fiduciary standard « PRACTICAL STOCK INVESTING | Stock Investing

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