Will Congress blow a once-in-a-generation chance to help Americans get better financial advice? It looks increasingly likely.
One of the biggest problems people have when they receive financial advice is that they don't always know where a financial professional's motivation and self-interest really lie. When you show up at a new-car dealership, it's pretty obvious what a salesman wants: If it's a Ford lot, he wants to sell you a Ford. But you know that going in, so you can filter what he says with proper skepticism.
The world of stocks, bonds and other financial products, however, is a lot more mysterious.
Some professionals are obligated to put your interests above theirs, meeting what's called a "fiduciary" standard. (Think of them as human versions of Consumer Reports, advising you to buy the best possible car at the best possible price.) Others are required only to pass a litmus test known as "suitability," leaving them room to sell you financial products that are a great deal for them, but might not be the best for you. (Think of them as car salesmen steering you toward the model that reaps them the biggest commission but has the worst repair record on the lot.) Still others wear both hats: At certain times when they work with you, they have to meet fiduciary standards, but at other times their recommendations just have to be suitable. You might not even know how they're being paid: Maybe it's a fee you pay them, or maybe they earn a commission from the company whose product they're selling you. Or maybe they make money both ways.
Is that confusing? Of course it is. A RAND Corporation study released by the Securities and Exchange Commission two years ago contains plentiful evidence that even well-educated investors have no idea what financial professionals' obligations are, or where their self-interest lies. For example:
- Ninety-six percent of surveyed investors understood that brokers receive commissions on a client's purchases or trades. But only 34% believed that “financial advisers” or “financial consultants” receive such commissions. Problem is, brokers, advisers and consultants are often the same thing: A “financial consultant” is simply a broker with a new business card.
- Fifty-eight percent of investors thought that brokers were legally obligated to disclose any conflicts of interest. For the most part, they aren't.
- The legal distinction between "fiduciary duty" and "suitability" in the investment world has been around for 70 years, but the American public, after all this time, still has no clue what the terms mean. "Even though we made attempts to explain fiduciary duty and suitability in plain language," explained woeful RAND researchers, "focus-group participants struggled to understand the differences...."
So what does this have to do with Congress? Everything. The financial-protection legislation that's been kicking around Washington contains measures that may change how financial professionals dispense financial advice. But in recent days, reports have circulated that vigorous pro-consumer measures in this area that were proposed last fall are being weakened in back-room negotiations. Most relevantly, the trade journal InvestmentNews and other sources have reported that the Senate Banking Committee, headed by Chris Dodd (D-Conn.), is backing away from a prior proposal to impose the strict, best-interest-of-clients fiduciary standard on brokers who give investment advice. Instead, apparently, the committee will propose that the SEC conduct an 18-month study of regulations for financial advisers and then report back with possible measures.
Supporters of the fiduciary standard hate that scenario. "That’s certainly not good for the consumer," says Bob Glovsky, chairman of the CFP Board of Standards, an organization that certifies financial planners and which has teamed with two other industry groups, the FPA and NAPFA, to lobby Congress on the subject of financial planning services. There's already plenty of evidence -- including the 204-page RAND study -- that consumers would benefit from a fiduciary rule imposed on brokers, he says. "We know the consumer is confused," says Glovsky. Replacing the mandate with a study, he says, is "really just punting it down the road."
Unfortunately, Congress is looking awfully weak in the knees when it comes to protecting the public's personal finances. Other reports indicate, for example, that Dodd and the Senate Banking Committee are thinking about making the proposed Consumer Financial Protection Agency not an independent watchdog, as originally envisioned, but an office inside the Federal Reserve -- an institution which over the past few years proved to be spectacularly terrible at protecting individuals from financial-industry excesses. Let's hope that, before Americans' resolve to shore up financial protection fades away, Congress doesn't lose its nerve.
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