Department of Labor Making a Mistake in Foregoing Fiduciary Standard

Last Updated Oct 31, 2011 10:07 AM EDT


The Dodd-Frank Act was designed to protect consumers from abusive practices of financial institutions. The bill mandated a study on whether financial advisors should be required to provide a fiduciary standard of care. The fiduciary standard requires finance advisors to provide advice solely in the best interest of clients. This is in sharp contrast to the lesser suitability standard that brokers and insurance agents typically operate under, which states that investments only need to be suitable for clients, not necessarily the best ones for them.

There's absolutely no reason to study the issue. The answer is actually quite simple. All one has to do is ask the simple question: Why would anyone pay for advice not required to be in their interest?

About five years ago, the Certified Financial Planner Board of Standards trailblazed this path when it required CFPs to adhere to the fiduciary standard when providing financial planning services. Note that the CFP requirement applies regardless of business model -- investment advisor or broker-dealer, fee-only or commissioned. Today, there are CFPs that operate successfully within each of these models.

We continue to hear from broker-dealers and insurance companies that investors will lose access to advice if the fiduciary standard of care became mandated. This is obviously sheer nonsense. It's only a cry from those whose profits would be hurt because they could no longer sell products with high commissions to clients if cheaper alternatives are available.

The sad story here is that Barney Frank, whose name is on the very bill designed to protect consumers, has now taken a position that clearly is in contradiction to the purposes of his own bill. In writing to Labor Secretary Hilda Solis, Frank stated that she should withdraw the proposal to require the fiduciary standard so it could be further studied to be sure that there's no an adverse effect on consumers. One has to wonder what would cause Frank to suddenly reverse position on his bill, why someone should be allowed to provide advice that is not in the client's best interest and why he would caution against applying the fiduciary standard to broker-dealers.

We already know that there would be no adverse effect (and there would be a huge benefit as abuses would end), and we have known this for years. There's no reason to delay this requirement. Applying the fiduciary standard to all providers of financial advice would go a long way to reducing the abusive sales practices that cost investors billions each year.

If the government isn't going to mandate that all providers of financial services follow a fiduciary standard, you should. Whether you're interviewing new advisors or are currently working with one, you should always make sure they're operating under such a standard. After all, why would you work with someone who isn't required to operate in your best interests?

Photo courtesy of Rep. Keith Ellison on Flickr.
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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.