The independent newsroom The Intercept recently reported that several states have begun implementing new rules for investment professionals. In most cases, these rules are meant to clarify whether any given investment professional is a fiduciary. A fiduciary is someone who is bound by law and ethics to act in your best interest, even above their own.
Under the laws in certain states, most wealth managers, financial consultants, retirement counselors and others with similar titles are not fiduciaries. That means that they can put their or their firms’ interests above yours, such as the fact that a certain investment garners them a greater fee. In large part, under the laws of those states, they are required only to recommend investments that are “suitable” for you in terms of your age, overall financial picture, future needs and risk tolerance.
Who is already a fiduciary? And who should be?
The Securities and Exchange Commission oversees what are called “registered investment advisers,” and these are fiduciaries. However, in many states the financial planning professionals with whom most consumers interact are ordinary stockbrokers and may not be regarded as fiduciaries. Pennsylvania is a state in which legal authority exists for subjecting brokers and financial advisors to fiduciary duties, at least in certain circumstances.
According to The Intercept, some of the brokers and financial advisors who may not be regarded as fiduciaries in certain states advertise themselves as trusted professionals who do put client interests first. In addition, in many cases, FINRA-regulated stockbrokers are also registered investment advisers. This can understandably lead to consumer confusion about which investment professionals are truly bound to act in their interest or which “hat” a professional may be wearing in the course of providing investment advice to any given customer.
In 2017, the U.S. Department of Labor put a new fiduciary rule into effect that covered retirement accounts. It would have required financial professionals working with such accounts to act as fiduciaries. However, it was ultimately vacated by a federal appellate court after it was challenged by industry groups.
The SEC has proposed a new fiduciary rule, which could be finalized later this year. However, the president of the North American Securities Administrators Association said the proposal is so weak that it is “an invitation to continue business as usual.”
States may step in if the federal government doesn’t clarify the rules
Recently, New York tried its hand at clarifying who is a fiduciary. The proposed Investment Transparency Act attempts to protect consumers by requiring non-fiduciaries to make the following disclosures to their clients:
“I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks, and expected returns for you.”
Investment professionals have argued that the disclaimer could unduly interfere with their discussions with potential clients.
Other states, including Nevada, New Jersey and Maryland, also have fiduciary proposals in place that are aimed at protecting individual investors from self-serving brokers and dealers.
What can I do to protect myself?
The first step is to ask your investment professional if he or she is a fiduciary. You may not need to make a change even if the answer is negative, but you need to know if your interests are at the forefront of your advisor’s priorities.
If you invested with a professional advisor and believe you may have lost money due to apparent misconduct, you should have an experienced securities attorney review the handling of your account as soon as possible.