If you’ve been paying attention to the financial headlines lately, you’ve probably noticed that quite a few of them have been dedicated to the Dodd-Frank legislation of 2010, which contained several action items intended to “clean up” the financial services industry. Three years later, one item in particular is making headlines: a statement that authorized the SEC to establish a rule requiring securities brokers to act as fiduciaries.
What does that mean for you?
Well, if your money is currently managed by a brokerage firm, it potentially means a lot. Right now, brokers generally are not held to a fiduciary standard, meaning they generally don’t have a legal obligation to act in your best interests. They are required by law to make recommendations that are suitable for your needs. This means that certain brokerage firms can sell you proprietary products and/or other products they stand to benefit from the sale of.
To be clear: This doesn’t mean that proprietary products are bad; it simply means that you have the right to question why your advisor is suggesting a particular product. If s/he stands to gain from its sale, you may want to do your own due diligence and investigate whether this is truly the best option for your personal retirement goals.
Registered Investment Advisors (RIAs or RIA firms), which is the heading that Wealth Enhancement Advisory Services falls under, are required by law to act in a fiduciary capacity. This means that we legally must act in our clients’ best interests at all times when making financial recommendations.
So, you may be asking, why would anyone NOT want to work with someone who is legally required to work in their best interests?
Where people usually decide whether or not to use a fiduciary versus someone a non-fiduciary revolves around cost and the future of their relationship. Generally speaking, fiduciaries charge a fee and non-fiduciary advisors charge a commission. The fees charged by an RIA, for example, might be higher than the commissions one comes across with a broker.
And maybe that’s OK with you – maybe you’re not looking for a long-term partnership with an advisor that gives you continuous advice; maybe you just want some one-off advice for one particular move. In that case, it may be more reasonable to go with a broker. Either model may be right for you, based on your investment objectives.
The U.S. Department of Labor is already weighing on what they think should be done: Jason Zweig of The Wall Street Journal reported on August 9, 2013 that “as early as October, the U.S. Department of Labor is expected to propose new rules that would ensure that brokers and other securities professionals would act solely for the benefit of their clients when advising on individual retirement accounts (IRAs).”
How this impacts you, the consumer, remains to be seen. If the SEC ends up establishing a fiduciary standard for brokers, there could be major changes ahead for the financial services industry.
Nothing changes for the RIAs, though. We’re still held to the same high standard we’ve been upholding for years at Wealth Enhancement Group. Through our fiduciary responsibility to our clients, you can be sure that when you work with us, your advisor is consistently giving you advice that’s objective, unbiased and always in your best interest.