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Is Your Investment Adviser Working in Your Best Interest?

If you’re a client of PFS, you have likely heard us preach about the importance of working with an investment adviser who is held to a fiduciary standard—in other words, someone who is legally bound to act in their clients’ best interest.  As a Registered Investment Adviser (RIA) firm and as Certified Financial Planners™, we at PFS are held to that standard, and we take our fiduciary responsibility seriously.  U.S. investors might be surprised to learn, however, that many investment advisers are not legally required to act in their best interest. 

Will New SEC Rules Hold Advisers to a Higher Bar?  Most broker-dealers are held to a “suitability” standard— a much less stringent legal requirement than the fiduciary standard—which demands only that investment recommendations be “suitable” for a client based on age, risk tolerance, etc.  In June 2019, the Securities and Exchange Commission (SEC) passed new rules to try to increase investor protections.  One of the main components, called Regulation Best Interest, aimed to “substantially enhance the broker-dealer standard of conduct beyond existing suitability obligations,” according to the SEC press release.  Unfortunately, these rules included only weak requirements to try to mitigate (rather than eliminate) conflicts of interest among broker-dealers and failed to establish any enforcement mechanism to ensure compliance, so they are unlikely to significantly improve protections for those who work with non-fiduciary advisers.  Even one of the four SEC commissioners, Robert Jackson, voted against the rules and criticized them as retaining a “muddled standard that exposes millions of Americans to the costs of conflicted advice.”  Jackson encouraged investors to “seek out true fiduciary advice from financial professionals who have chosen to hold themselves to higher standards,” citing the Code of Ethics for Certified Financial Planners™ as an example of that.

Will the SEC Rules Yield Any Improvement in Broker Dealer Behavior?  While the new SEC rules contain only weak provisions on conflicts of interest, they will likely compel some improvement in the ways that broker dealers advise their clients.  The rules include a more significant obligation to disclose fees, scope of services, and other details to clients; a prohibition on offering only limited investment products (e.g. proprietary funds); and a ban on sales contests and quotas based on selling specific securities or types of securities.  However, the SEC rules do not come close matching the level of investor protections in the rule that was passed by the Department of Labor two years ago (and then later reversed), which we discussed in a blog post at the time.  As a recent Forbes article observed, “if the DOL fiduciary rule had teeth, this new SEC rule just has gums.”

What Does It Mean that PFS Advisers Are Fiduciaries?  Why is it important to work with an adviser who is a fiduciary?  The recently-updated CFP® Code of Ethics outlines what our fiduciary responsibilities entail, namely:

  • Duty of Loyalty—to place the interests of our clients above those of ourselves and our firm and to avoid or fully disclose and manage any conflicts of interest such that we are still acting in the client’s best interest;
  • Duty of Care—to act with prudence, skill, and diligence in light of clients’ goals and circumstances;
  • Duty to Follow Client Instructions—to comply with objectives and terms of client engagements and all reasonable and lawful directions from the client.

If these standards do not apply to your adviser relationship, it would be difficult to ascertain, especially if you have limited investment experience, whether and to what extent the adviser is making investment (and possibly financial planning) recommendations in your best interest or for his/her own benefit. If you are interested in learning more about the differences among investment advisers in an entertaining way, we recommend our 2016 post, “Why Comedian John Oliver Would Love PFS.”  John Oliver really delved into the subject and hit on a number of great points—we are still grateful to the clients who brought this piece to our attention three years ago!


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