It’s hard to watch TV for any length of time, and not see a commercial for a financial services company. There’s a reason they spend so much money on advertising — and that reason is your retirement savings. You are the goose that lays golden eggs for them. Over the course of your investment lifetime they will reap thousands in fees from your account, while you accept all the downside risk; that’s worth a few TV spots featuring a B-list celebrity spokesperson.
But there are things the financial services sector doesn’t want you to know, and they have spent millions lobbying Congress to keep it that way. Maybe your investment adviser is in your camp and giving you good advice, but the odds are not in your favor. According to a recent Frontline documentary, 85% of financial advisers are either brokers or salesman, with more incentive to steer you to the highest fees rather than the the best returns.
It’s All About The Standards
Most brokers and internal salespeople operate under what’s call the “suitability rule”, which is actually a pretty low bar to meet when it comes to financial advice. Financial advisors operating under the suitability rule don’t have to steer you to financial products with the best returns or lowest fees, merely the ones they deem suitable to your financial situation. Under the somewhat lax suitability rule, unless it’s a Ponzi scheme or an outright scam, you don’t really have much recourse if the investment goes bad.
Suitability carries with it a certain conflict of interest. The salesman is torn between the demands of margin & profit and your best interests. When push comes to shove in the corporate world, which one do you think wins? If you ever get a vague sense of unease that the nice broker isn’t giving you the whole story, you should probably pay attention to that feeling.
The other standard for investment advice is called the “fiduciary standard,” and comes with a set of rules that clearly restrict your financial adviser to operating in your best interest and not their own. It takes a lot more work to operate under the fiduciary standard, including going through a certification process that requires them to uphold certain investment standards that are outlined and enforced by state regulators. The fiduciary standard is what separates salesmen from actual investment advisers.
Even the higher fiduciary standard isn’t always a guarantee that you’ll get the very best financial advice; but it will certainly improve your odds and, if you do catch your fiduciary financial planner feathering his own nest, you’ll have a better chance in arbitration.
Last year investment companies beat back an attempt by the administration to put an end to this incestuous pit of conflict and deception, by requiring all investment houses handling the public’s money to meet the higher standard of fiduciary duty. Investment companies responded with a full court press lobbying blitz, aimed at rolling back the rules and keeping the less stringent suitability rule in place.
Financial services companies argued it would be too expensive to meet the new standards, and they might just have to throw in the towel and go into another line of business. I’m not sure exactly why regulators eventually bowed to that threat — it sounds more like investment companies were prepared to do us all a favor.
There really is no substitute for learning the basics of investing, doing your own research on funds & equities to determine which offer the best returns at the lowest fees. With some practice you’ll discover that investing is not rocket science, and you really can do it yourself.