Is Your Financial Adviser Acting in Your Best Interest?


Brokerage firms’ advertising portrays brokers as trusted members of the family, writes Tara Siegel Bernard in her New York Times article, “Trusted Adviser or Stock Pusher? Finance Bill May Not Settle It.” Anyone who has tried to hold a broker to a fiduciary standard of conduct, however, hears a very different response: “We are mere order takers. You never should have trusted us.”

Ms. Bernard interviewed a number of former brokers, and what they told her is revealing. All told her that their jobs depended less on giving advice and more on closing sales. The more money they brought in, the more they, and their firms, would earn.

“I learned a lot about being a good salesman at Merrill,” said David B. Armstrong, who left Merrill Lynch after 10 years and with partners started an advisory firm in Alexandria, Va. “The amount of training I sat through to properly evaluate investment opportunities was almost nonexistent relative to the training I got on how to sell them.”

In his original draft of a financial reform bill, Senator Chris Dodd, chairman of the Senate Banking Committee, included a fiduciary standard of conduct, which would require brokers to put their customers’ interests ahead of their own when providing investment advice. But the bill that Dodd unveiled on March 15th omitted the fiduciary duty language and substituted in its place an 18-month study of the costs and benefits of including a fiduciary standard.

Apparently, the brokerage industry convinced Dodd and his committee that the fiduciary requirement should be scuttled because it could have an impact on the firms’ profits.

The firms and brokers make money on commissions and also through other arrangements, including what is known as revenue sharing, where mutual fund managers agree to share a portion of their revenue with the brokerage firm. By doing this, the funds may land on the brokerage firm’s list of “preferred” funds.

Unlike fiduciaries, brokers are not required by law to disclose how they are paid upfront or whether they are have incentives to push one investment over another. “The way the federal securities law regulates brokers, it does not require the delivery of information other than at the time of the transaction,” said Mercer E. Bullard, an associate professor at the University of Mississippi School of Law who serves on the Securities and Exchange Commission’s investment advisory committee.

The legislative language on fiduciary responsibility was one part of the financial overhaul bill aimed at protecting consumers’ interests. Another part, setting up an independent consumer protection agency, was also watered down.

Consumer advocates contended that the study would stop regulators from making any incremental consumer-friendly changes until the study was completed. The study would also require the SEC to rehash material already covered in a 228-page study, conducted by the RAND Corporation in 2008 at a cost of about $875,000, the advocates said.

“In my opinion, the Johnson study is a stalling tactic that will either substantially delay or totally prevent a strong fiduciary standard from being applied,” said Kristina Fausti, a former SEC lawyer who specialized in broker-dealer regulation.

“The S.E.C. has been studying issues related to investment-adviser and broker-dealer regulation and overall market conditions for over 10 years,” she said. “It’s puzzling to me why you would ask an agency to conduct a study when it is already an expert in the regulatory issues being discussed.”