The Securities and Exchange Commission’s recommendation last Friday that anyone advising retail investors adhere to one universal standard of fiduciary duty may sound esoteric to those of you who mistakenly thought it existed all along. 

But for years, brokers have routinely pushed stocks underwritten by their companies or mutual funds which paid the broker a revenue-sharing deal.  In these cases, the broker doesn’t provide objective advice to their clients, and puts their personal financial benefit ahead of any purported benefit to their client.

Investment advisers, meanwhile, have been held to a higher standard by regulators.

The SEC’s proposed new fiduciary standard recommends that brokers “act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”

Brokers have asserted that their conflicts of interest are covered in their disclosure documents.  But studies have repeatedly found “that disclosure is, at best, insufficient for addressing conflicts of interest,” according to Knut A. Rostad, chairman of the Committee for the Fiduciary Standard. “Indeed, there is convincing evidence that disclosures are frequently confusing and misleading for investors, even when made under the best circumstances with the purest of intentions.”  In addition, many investors simply do not read or understand the disclosures that are commonly buried in mutual fund prospectuses and broker agreements, which are drafted by lawyers.

While this debate has been going on for years among the financial services industry and regulators, it has not attracted the attention of many individual investors.  As a result, brokers have been working under a much less stringent set of ethical standards than financial advisors, who are bound by a fiduciary standard. 

This has finally become an unworkable situation, according to SEC Chairwoman Mary Schapiro, who said in a speech to the Consumer Federation of America: “I believe that all securities professionals should be subject to the same fiduciary duty — and that all investors receiving advice should rest assured that the advice they get is being given with their interest at heart. But, to be effective, the fiduciary duty needs to be meaningful and uniform across all securities professionals. It cannot be weakened or diluted just so that it can be applied broadly.” 

What Investors Should Do

Regardless of whether the SEC enacts a new fiduciary standard, individual investors who want objective advice from their financial professional can take these steps:

• Ask your broker or financial advisors if they are receiving any commission, revenue-sharing, trail or other monetary or non-monetary incentives from the fund company or brokerage firm selling the investment. If so, how much are they receiving?
• Ask what other similar and suitable investments are available Remember: No investment product today is unique. There are other very similar products available which may be better suited to your needs.
• If you bought mutual funds from a broker, ask if your broker has been receiving revenue from a mutual fund company for any funds you have bought.  If so, ask for a portion of this money to be paid to you.  After all, your purchase generated the revenue-sharing in the first place, and without it the broker would never have received any compensation.  Mutual fund revenue-sharing is paid quarterly or semi-annually to the broker-deal and/or the broker who sold you the mutual funds.  If you have owned the mutual funds for years, the revenue-sharing payment could go into thousands of dollars.
• If you want greater peace of mind about working with a broker who may have a conflict of interest when it comes to providing objective investment advice, find a fee-only financial planner or a financial planner who readily has adopted and followed the fiduciary standard.

Whichever type of financial professional you have (broker or financial planner), remain vigilant about protecting your own interests and getting the bets, objective advice possible.  Don’t rely on the SEC, brokerage firms, mutual fund companies or other large financial institutions to protect your own interests.