investing

How the fiduciary standard protects you

Investors should also ask which licenses the adviser has: the Series 7 or Series 65. The former allows brokers to sell securities.

Registered investment advisers are fiduciaries and they must have the Series 65 license. Some advisers may have both.

"I am a registered investment adviser with the (Securities and Exchange Commission), and that means that I cannot legally collect a commission, and I am not what's called dually registered (under both licenses). So I can't even legally collect a commission when I make a recommendation on any type of product or service," Hatton says.

Whether or not commissions inherently create conflicts of interest is a contentious topic.

If and when the SEC comes out with a rule extending the fiduciary standard to all financial advisers, it's most likely to require disclosure of payments as a way of minimizing the conflict.

It's not just investors who need an education in financial literacy; the industry could use a little schooling as well.

"Financial services executives and reps really need to raise their ethical literacy because right now a true professional has an obligation to serve the best interest of their clients. A professional also has an obligation to other members of their profession. And they also have an obligation to society, and all of those things are important," says Blaine Aikin, president and CEO of fi360, a fiduciary education and consulting firm.

Why is regulation necessary?

The Dodd-Frank Act gave the SEC the leeway to decide if broker-dealers should be regulated under the fiduciary standard. The SEC found that a higher standard of care for clients is needed, and it's currently in the process of hashing out the details.

But there is another regulatory movement afoot from the Department of Labor. It's working to change the definition of who is a fiduciary under the Employee Retirement Income Security Act, or ERISA, which is a complex set of regulations governing workplace retirement plans.

"Currently there is a five-part definition of fiduciary. It's very hard to enforce because all five parts have to apply in order for someone to be deemed a fiduciary. There are two parts that are particularly important. One part is that advice given must be regular," says Aikin.

That can be something of a loophole. If a financial professional gives someone personalized advice once, or on anything other than on a regular basis, he or she escapes fiduciary accountability.

The other tricky part of the current definition is that for the adviser to be held to a fiduciary standard, the advice must be the primary source of decision-making.

"What the new definition would say is that as long as it's personalized advice, it's fiduciary. It also goes on to say that it doesn't matter if it is primary advice, the main consideration is that it's advice that was material to the decision," Aikin says.

It's a big change, especially because the definition would apply to IRAs, which are not covered under ERISA.

"This is huge because there is a lot of advice being given to individual investors that is not being held to high standards of objectivity and competence, and investors don't know it," Aikin says.

Conversely, there are stringent limitations on the types of advice plan providers can offer to participants in workplace retirement plans such as 401(k)s. Conflicts of interest are painstakingly minimized.

For instance, a retirement plan administrator giving advice to plan participants receives a level fee no matter which investments are chosen. Or the advice can come from a computer model, as long as it has been approved as unbiased.

As everyone agrees that advisers should not be able to unfairly enrich themselves at the expense of workers' employer-sponsored plans, should IRAs be treated differently?

In an ideal world, ethical behavior would not need to be enforced by regulation. But we are talking about Wall Street, where the bottom line can supersede all ethical considerations. If individuals voted with their wallets and demanded ethical and fair treatment from the financial services industry, everyone would benefit.

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