One of my “broken record” themes over the years has been the importance of requiring financial advisors to have a legal responsibility to act as a fiduciary. This simply means the advisor is required to put your best interest first.
Like attorneys and accountants, financial planners who register with the Securities and Exchange Commission (SEC) as Registered Investment Advisors (RIA) have such a fiduciary responsibility to their clients. However, not every “advisor” or “financial planner” is registered with the SEC and required to act as a fiduciary.
Currently, stockbrokers and agents selling financial products like annuities, life insurance, and mutual funds are not required to register with the SEC and act in their customers’ best interests. Their fiduciary duty is to the companies they work for, not to the customers who buy their products.
The financial regulatory reform bill now before Congress originally would have extended this fiduciary standard to every provider of financial advice.
Brokers who combine product sales and investment advice have a built-in conflict of interest. Their jobs depend upon selling products that generate 
the most profit for their companies, with only a vague legal requirement that those products be “suitable” for their customers.
In recent years, large financial institutions began offering increasingly complex and, in some cases, unregulated and unrated investments. The lines between banking services, sale of financial products, and investment advice became increasingly blurred. In too many cases, the best interests of consumers were left out of the picture altogether. In some cases, these companies’ actions brought huge losses for themselves and their investors.
These losses, coupled with the current economic crisis, brought demands from the public for protection against these predatory “investments.” Congress is currently considering a broad regulatory reform bill. The Senate version originally included a crucial provision that would have held every provider of financial advice to a fiduciary standard. This provision has strong support from consumers of financial advice.
Senator Tim Johnson, however, a member of the Banking, Housing, and Urban Affairs Committee, added an amendment cutting that requirement. Senator Johnson thinks the Senate should “study” the issue.
What’s to study? The idea is simple. Either consumers deserve to have the financial advice they pay for be in their best interests, or they don’t.
I believe consumers do deserve advice that’s in their best interests. To those of us who are fiduciary practitioners, the solution is obvious: require everybody to act in the best interests of their customers/clients by imposing a fiduciary standard.
Unfortunately, when it comes to influencing legislation, the financial professionals supporting a fiduciary standard are overwhelmingly outnumbered. Financial planners who choose to be fiduciaries are far fewer than those in the financial product sales industry, which has the financial clout to make large campaign contributions. Financial columnist Bob Veres describes this process all too vividly in an online column for Financial Planning magazine.
My colleagues in the financial planning profession and I believe that small investors, purchasers of IRAs, and consumers in general would be better served if anyone wanting to sell them financial advice were required to act in their best interests.
Yet without some significant lobbying from taxpayers, the Senate is almost certainly going to pass a regulatory reform bill that lacks this important consumer protection. For more details, check out Jason Zweig’s February 27 column in The Wall Street Journal.
Whether you support or oppose keeping the fiduciary requirement in the regulatory reform bill, please let Senator Johnson know. His office address is 136 Hart Senate Office Building, Washington, DC 20510; telephone 202-224-5842. You can send an email here. For his South Dakota offices, call 800-537-0025, or call Rapid City at 605-341-3990; Sioux Falls at 605-332-8896; or Aberdeen at 605-226-3440.
I’m emailing him this column; with any luck, he’ll become a regular reader.
