Can You Tell the Broker From the RIA?

Meet Tom and Jerry. One's a broker; the other's a Registered Investment Adviser. Both of them have studied the SEC's new Customer Relationship Summary and will describe their proposed relationship with you, the investor, exactly as the SEC prescribes:

Can you tell which is which?

Tom: "When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours."

Jerry:  "When we provide you with a recommendation, we have to act in your best interest and not put our interest ahead of yours.”

Yup, Tom's the RIA. Obvious, wasn't it? Can't imagine the slightest risk of investor confusion.

Whatever happened to the fiduciary standard?

No Fiduciary Rule? No Big Deal

The Fiduciary Rule, imposed by the Labor Department and limited to retirement accounts (although the resulting switch from brokerage commissions to annual fees was more sweeping) is dead.

Two reasons why the period of mourning can be brief:

1. In the bad old days, high-cost investments sold by brokers were typically cats and dogs – stocks with a high potential for becoming worthless. Today's investors are less likely to lose everything in products sold by non-fiduciaries. Instead, higher expenses will reduce their returns.

2. Although 40 percent of investors are said not to know what they pay in expenses, the shift from commissions to fees has made investment costs more transparent. And today's investors are far more likely to ask  their advisers, "Are you a fiduciary?"

Fiduciaries are easy to find – bank trust units and independent advisory firms are everywhere.  All the prudent investor has to do is hire one.

Sorta, Kinda But Maybe Not Really Fiduciary

Some investment advisers are fiduciaries, others sell products. Telling the difference has never been easy.

Leading discount brokers, for instance,  invite investors to talk with representatives who aren't paid commissions. Does that make them fiduciaries? Not in the view of The Wall Street Journal.

Investors who seek advice from discount brokerage firms might assume the counsel they get is impartial, given how these firms have rejected the old Wall Street model of working on commissions.

In fact, advisers at some of the biggest discount brokerage firms make more money if they steer clients toward more-expensive products, according to disclosures from the firms and people who used to work at them. That means customers could end up with investment products and services that are costlier than they need.

Fidelity's reps, for instance, get a small cut (0.04%) when a customer buys ETFs. Their financial incentive is more than twice as great (0.10%) if they sell managed accounts or annuities. Reps especially proficient at directing customers to pricey products get bonuses.

Fidelity, Schwab and TD Ameritrade all pay incentives to representatives for referring clients to registered investment advisers. "These advisers charge clients an annual percentage of their assets, and the discount brokerage firms receive up to 0.25% annually on assets committed to the advisers."

This year, at long last,  the SEC is expected to weigh in on the fiduciary issue. But the emphasis appears to be on disclosure rather than behavior. (Why should brokers call themselves "financial advisers"?) Knut A. Rostad of the Institute for the Fiduciary Standard asks, "Are commercial sales rules increasingly redefining the very meaning of fiduciary advice?"

Caution: Some Investment Products May Be Hazardous to Your Health

John Bogle, from his recent NY Times op-ed on the fiduciary rule:

[Gary] Cohn, most recently the president of Goldman Sachs, called it “a bad rule” and likened it to “putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” Comparing healthy and unhealthy food to healthy and unhealthy investments is an interesting analogy.

Introduction of the Labor Department's fiduciary rule has been delayed, possibly forever. But the losing battle has had positive results. Investment costs are dropping, and more investors understand the difference between registered investment advisers and financial advisers.

Nevertheless, the terminology is designed to confuse. Michael Piwowar, the acting head of the Securities and Exchange Commission, believes a fiduciary rule is a bad idea . But he suggests it might be time to stop calling brokers "financial advisers." 

Got any ideas for an alternative designation?