I frequently hear industry “horror stories” from advisors who have taken on new clients, only to discover unsuitable—and very expensive—investments that had been recommended to said clients by a broker.
One recent case involves an elderly widow who was sold a ridiculously expensive whole life policy, seemingly for no good reason: her portfolio was more than sufficient to cover her retirement needs even if she lived to be 100, and her children’s inheritance had already been funded. But she was locked in to paying thousands of dollars each month into the policy, and thanks to documents the broker had her sign, even the state insurance commissioner couldn’t do anything about it.
Part of the current conversation about a fiduciary standard for brokers revolves around whether brokers can act in the best interests of their clients within a brokerage environment. Although many brokerage firms are very good at creating substantial financial incentives to sell excessively expensive and/or unnecessary products (as in the above example), and creating very reasonable sounding rationales for doing so (“suitability,” for instance), I still believe that some brokers can—and do—buck the system and act in the best interests of their clients.
But how are clients to know whether their broker is really acting in their best interest when he/she doesn’t have a legal responsibility to do so (at least not at all times)? And should the SEC step up and actually establish a fiduciary standard for brokers, how will they, FINRA or a third-party credentialing organization (such as the CFP Board) determine whether brokers are meeting that standard?
These are difficult questions in that the existing fiduciary standard at least is “principles based”: meaning that there is no set of rules to follow (such as FINRA’s safe harbors for sales practices). Instead, RIAs are simply required to act in the best interests of their clients at all times, and should client complaints arise, the SEC, FINRA, FINRA arbitration or the courts use the facts and circumstances to determine whether that standard was met in each case.
This isn’t a great deal of help for brokers trying to do right by their clients, or for third-party credentialing bodies and clients trying to determine whether a particular broker is truly client centered.