Identifying An Advisor’s Duty to You
According to Gallup’s 2023 Honesty and Ethics poll, a mere12% of American adults believe stockbrokers are highly ethical. This places them just above members of Congress, car salespeople, and advertising practitioners.
It’s not difficult to see why the public mistrusts the financial industry. Every decade, there are numerous examples of bad behavior that costs the average American. A few examples are the Wolf of Wall Street culture in the 1980’s, the 2008 mortgage crisis and ensuing financial collapse as well as the current long list of firms getting sued by the SEC for improper business practices and unethical conduct.
Despite this, the average person must navigate this minefield to get ahead financially.
It would be great if a magic wand could be waved ensuring all financial practitioners’ function in their clients’ best interests. The foundation of the “fiduciary duty” requires an advisor to do what is in their client’s best interest.
And yet, we are dealing with humans who are flawed and operate in a system with many subtleties and conflicts of interest. Furthermore, Wall Street is protected by incredibly powerful lobbyists and lawyers who successfully craft laws with caveats and exemptions. This should open the eyes of every investor.
Recognizing no human is perfect, the average person is wise to move forward, but with questions to identify and evaluate the size and magnitude of conflicts.
First, ask for disclosure on the standard of care owed by your investment professional. Are they a fiduciary, meaning they are obligated to do what is in your best interest?
Even if they are a fiduciary, ask if they are a fiduciary in all your dealings, or just during one sub-set of broader conversations. Obviously, you probably gain the best protections when working with someone who is a fiduciary in all dealings.
If an advisor is not a fiduciary, ask more questions designed to identify the obligation owed. Most stockbrokers are not fiduciaries but rather function under a more liberal standard called Regulation Best Interest. This requires them to act in a client’s best interest only at the time of making a recommendation and only for that recommendation. This does not include an ongoing obligation that ensures all guidance remains solely in a client’s best interest across every aspect of their finances.
Complicating matters, many professionals act in both capacities. They may be registered both as a broker (non-fiduciary) and as an investment adviser (fiduciary). Sometimes, these “dual hat” advisors can serve a single client in a fiduciary role for one account while acting as a non-fiduciary for another account or product. This arrangement is incredibly confusing for clients seeking consistent, fiduciary-level service.
It is also important to ask which regulatory body oversees the advisor. A registered investment advisor is regulated either by the state securities board or the SEC. A broker is typically regulated by the SEC and the Financial Industry Regulatory Authority (FINRA). If an advisor has multiple regulators, it is a good indication they are dual registered. Once you determine the regulatory body, pull the advisor’s registration and review for violations of legal or ethical conduct. You can view the advisor’s record via https://brokercheck.finra.org.
When asking questions, request responses in writing. Written responses are admissible in court. As such, people attempting to be evasive have far less latitude. If they won’t put it in writing, that tells you everything you need to know. Run the other way.
If they do put it in writing, it offers a document to read after-the-fact to make sure you understand. The written summary needs to be in plain English that is one page or less. Many advisors will offer a 350-page document full of legal jargon. Although that legally offers disclosure, it is most likely not written in language the average person will understand.
Follow the money. Whenever someone says, “Its free” or “There is no charge for our services,” stop and ask for more details, in writing. Capitalism does not work if there is no exchange of value. Wall Street is not a non-profit organization. Given this, if you follow the money, you will have a better idea of where and how conflicts of interest present themselves. Ask for full disclosure, in writing, how your advisor, or their firm will derive benefits (not just money) from working with you.