I’ve written previous columns about the importance of working with financial advisors for whom you are a client rather than a customer. To a fee-only financial planner, you are the client. Like an attorney or accountant, the planner has a fiduciary responsibility to put your interests first.
To a stockbroker, essentially a salesperson who earns income by selling products, you are a customer. The broker’s fiduciary duty is to the company he or she works for. Brokers who combine product sales and investment advice have a built-in conflict of interest.
In recent years, brokerage firms like Merrill Lynch have done their best to blur the line between investment advisors and product salespeople. Now, according to Bob Veres, a respected financial journalist who publishes the online industry newsletter Inside Information, they may succeed in erasing that line completely.
Veres’s latest e-column, titled “The Seeds of the Next Scandal,” makes for appalling reading. He says, “While 
the world is still reeling from the sales of toxic-but-high-commission investment products, the brokerage lobbyists are on the verge of eliminating the fiduciary concept from our regulatory lexicon. They believe that it will happen without even an opportunity for debate in Congress.”
Increasingly, as technology makes investment information and processes more accessible, the traditional model of stockbrokers earning fees for investment services no longer works. There’s not a problem with brokerage firms charging fees for investment advice—as long as they are held to a fiduciary standard that requires them to put their clients’ interests first.
To date, this has not been the case. As Veres points out, some brokerage firms have been making money in three ways:
1. Charging customers for financial advice,
2. Selling those same customers their own product lines, and
3. Selling those same customers investments owned by the firms themselves—investments the firms no longer wanted, like toxic paper.
The second and third of these practices clearly would not be permitted under a fiduciary standard. Obviously, then, the firms relying on those income sources have a strong incentive not to register with the SEC and bring themselves under the fiduciary regulation that applies to registered investment advisors.
Instead, lobbyists for the brokerage industry are doing their best to persuade Congress to revise the current regulations to weaken the fiduciary oversight even further. I don’t have space in one column to delve into the details of this effort, as Veres does so well in his newsletter.
There is, however, one aspect of it I want to point out. According to industry insiders that Veres interviewed, chances are these regulatory changes will be voted into law by being slipped into a larger bill, such as a complex financial stimulus package. Senator Chuck Schumer of New York is apparently a supporter of the brokerage industry’s position. He also, as chair of the Joint Economic Committee, would be involved in the final wording of any stimulus bill.
Veres is not optimistic. He believes these regulatory changes will be passed, and that they will provide fertile ground for the next generation of financial scandals.
If he’s right, it will become more important than ever for consumers to educate themselves. Don’t rely on what someone’s business card or website says. Anyone can use terms such as financial planner, financial advisor, or investment counselor. Instead, demand that the “planner” sign a statement that you will be a client. Ask tough questions about fees and commissions.
Use your own common sense—and follow the money. Wherever the money comes from, that’s where the loyalty goes. Only as a client rather than a customer can you be sure an advisor’s loyalty is to you.
