Does Your Adviser Have a Conflict of Interest?
“Whose interest is a retirement adviser supposed to serve?” asked Michael Grunwald in Politico.com. The Obama administration wants to ensure that it’s always the client’s. The Department of Labor is considering a rule change that would apply a “fiduciary standard” to all financial advisers, who would be required to put their client’s best interest ahead of their own personal gain. This would be a sea change in an industry in which many brokers receive hidden commissions for steering their clients’ IRAs and 401(k)s into costly investments that may not offer maximum benefits. The White House estimates these shady practices cost Americans $17 billion every year. Brokerages call the 1,000-plus-page rule “onerous and unworkable” and are working furiously to kill it before it’s finalized next spring.
The Labor Department’s rule would “hurt the very people it is supposed to help,” said The Wall Street Journal in an editorial. Instead of protecting investors, it will effectively raise costs and limit choices. “Investors of modest means” won’t be able to afford expensive, fee-only advisers who require a minimum of $25,000 or more in assets to invest. Incredibly, the Obama administration has suggested that small savers rely on financial software or robo-advisers. “We’d prefer the flesh-and-blood adviser who may have been recommended by a friend.”
Your friend may not realize he’s being ripped off, said Suzanne McGee in The Guardian (U.K.). Currently, most brokers are covered by a looser “suitability” standard, meaning the investments they suggest need only be “more or less appropriate” to your financial situation. Their primary duty is to the brokerage firms that employ them, which is why they sometimes steer assets into investment products with hidden fees or mediocre returns. If your adviser’s first legal duty is not to you, the client, you can’t count on that person to resolve conflicts of interest in your favor. “You can’t be a parttime fiduciary; it’s like being a little bit pregnant.”
It’s wrong to judge an adviser’s competence by how he’s compensated, said Edward W. Gjertsen II, president of the Financial Planning Association, in Time.com. “There are good, honest, hardworking financial advisers of all business and compensation models.” A good adviser will fully disclose anything that may or may not impact the client-adviser relationship. This debate may only be resolved by the 2016 election, said Rick Levinson in TheStreet.com. If Republicans win the White House next year, the fiduciary rule “may never see the light of day.” So to make sure you’re receiving advice free of conflicts of interest, ask how your adviser is paid. “If he or she won’t tell you, walk away.”
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