Financial professionals are waging a heated battle over a little-noticed part of the financial reform bill moving through
Two similar versions of financial reform -- the one approved by the
All those thorny issues got far more attention than a provision dealing with the duties of financial advisors to their clients. The
House version demands a high standard for all advisors; the
Now there's a last-ditch battle to determine whether the reform package ultimately will require all financial advisors to be fiduciaries, or trustees, for their clients, as the House bill requires. Why does that matter?
This fiduciary provision is simple, says
If they have a conflict of interest, they have to disclose it. If they think an investment you own or a product they're selling isn't good for you, they have to say so.
You thought that was already true? Think again, said
In fact, these "advisors" can now sell you products that pay them big commissions, without advising you that there might be a far better (and cheaper) alternative for you -- it just wouldn't be as good for them.
"I think that if clients knew the difference upfront, they would never choose an advisor who was not a fiduciary," Jaffe said. "The problem is that people think their advisor has their back, when he's looking after his own self-interest, not yours."
The battle over holding all financial advisors to a fiduciary standard has been going on for years, Webster said. Each time, the rule has been derailed by a relentless and well-funded misinformation campaign. The same holds true today, he said. What are you going to hear about the fiduciary proposals, and what's the truth?
Myth: Imposing a fiduciary standard on all financial advisors would deny investors access to valued products and services.
Reality: Investment professionals could sell exactly the same products they sell now, but they would not be able to tell you that they were offering impartial advice when they were simply trying to sell a product that would earn them a commission.
Myth: If this standard was applied, brokers would not be able to sell clients investments that were held in the firm's portfolio, such as initial public stock offerings. Investment advisors also might have to constrain their clients from taking risks that they want to take, such as holding a large portion of their portfolio in one industry, investment class or one company's stock.
Reality: So-called principal trading -- trading from the brokerage firm's own account -- presents conflicts of interest that would have to be disclosed. (And wouldn't that have been nice for all of those
Myth: It's not clear that the system is broken. It should be studied, not fixed.
Reality: Brokers and insurance agents take great pains to obscure the difference between advisors who must look out for your best interests and those who don't have to. That leaves investors learning the lesson of who they can trust too late -- when they're already stuck with a high-cost, low-value product that enriched the advisor rather than the investor. It's time to stop calling salesmen advisors.
It's also a myth to imagine that you could relax and forget about your investments if
"Life is not a fairy tale," Jaffe said. People like
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Fiduciary Provision May Be Most Important Part of Financial Reform Bill
(c) 2010 Kathy Kristof