By Mark Miller

Should a financial advisor be required to put your best interests first? The answer seems obvious, but the question is being punted back and forth between lawmakers and regulators trying to re-structure oversight of financial advisory services in the wake of the 2008 financial meltdown.

At issue here is a provision of the new Dodd-Frank financial services reform law that addresses the so-called fiduciary standard, which is a legal responsibility requiring an advisor to put the best interest of a client ahead of all else.

Registered Investment Advisors (RIA) already are required to meet that standard. Stockbrokers, broker-dealer representatives and people who sell financial products for banks or insurance companies adhere to a weaker "suitability" standard.

The difference between "best interest" and suitability can be huge. Advisors who work on commission at big brokerage firms often have marching orders to sell proprietary in-house products, such as mutual funds or shares of initial public offerings that they manage. These products often come with much higher fees and other costs than could be obtained outside the firm. A product like that might be "suitable" for you without necessarily being the best solution available in the marketplace.

Wall Street fought hard during the Dodd-Frank legislative process to head off outright adoption of a fiduciary standard for their brokers, arguing that it would be counter-productive, increase their compliance cost and reduce profits. The SEC study was ordered up instead as a compromise.

The study was released at the end of January, and it calls in no uncertain terms for adoption of a uniform fiduciary standard across all segments of the industry. Wall Street broker-dealers and investment advisors would be subject to the same standard to which RIAs already adhere. The report argues that a uniform fiduciary standard will reduce confusion among investors about the role of various types of financial advisors.

But don't expect the industry to re-make itself overnight. For one thing, the report goes out of its way to state that it isn't calling for abandonment of any existing business models or fee structures currently used in the industry--and Dodd-Frank doesn't, either. That's a nod to the simple fact that the brokerage industry's profits derive mainly from sale of proprietary offerings, and commissions. So, it's not clear exactly how these firms can adopt a fiduciary standard without upending their entire business models.

The SEC also tossed a key question back to Congress--namely, how best to unify regulation of the industry. Currently, RIAs are regulated by the Securities and Exchange Commission (SEC), while Wall Street brokers are overseen by a self-regulatory organization, the Financial Industry Regulatory Authority (FINRA).

The SEC study offered up three oversight options: Bring brokers under the SEC umbrella, create a new self-regulatory organization or hand the entire job to FINRA. Wall Street will want FINRA oversight--an option that will worry RIAs. They're used to SEC oversight and worry that brokers would get favorable treatment there, since Wall Street provides most of FINRA's funding. Congress will have to sign off on any of these options before implementation can begin.

These issues will be the subject of substantial debate and lobbying now that the oversight question has been sent back to Congress. At the same time, the SEC commissioners face the task of adapting the report into actual rules. Many experts expect the commission to straddle the fence by stopping short of requiring full-blown fiduciary responsibility for brokers, instead opting for more clarity of disclosure to clients.

The bottom line for retirement investors: The SEC is expressing a clear, unambiguous preference for a strong fiduciary standard. But implementation probably is at least a couple of years away, so "buyer beware" should be your watchword when picking a financial advisor, or in continuing to retain one.

Can you get good advice from a non-fiduciary advisor? Yes. But investors should understand that this advice comes with motivations and rules very different from the RIA model.

Regular readers know I have a bias for RIAs, especially those who work on a fee-only basis. It might seem like you're paying less to a broker who earns her fee on commission, but RIAs give you the widest range of investment choices, often with the lowest fee structures. Paying an RIA out-of-pocket to get that result more than pays for itself over the long haul.

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Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire

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Personal Finance - SEC Takes Steps Toward Financial Planning Overhaul, But Issues Remain

© Mark Miller. Distributed By TRIBUNE MEDIA SERVICES, INC.