The financial reform bill now under consideration in Congress may or may not pass. But already, the folks in DC made the task of obtaining good financial help easier.
Under pressure from brokers and insurers who contribute much to political campaigns, the drafters of reform took out the one thing that would have best served the public. That one item was the requirement that all those who provide investment advice be fiduciaries; by law they would have to always act in the best interest of their clients.
The fact is: a broker has a strong incentive to earn commissions. He can do this by having you trade securities or by convincing you to go into a wrap account from which he and his firm extract fees whether or not anything is done on your behalf.
Similarly, the goal of an insurance agent is also to earn commissions. While agents can be helpful in obtaining appropriate insurance coverage, in the realm of investments their sales-charge loaded mutual funds and annuities raise their income, not yours.
In medicine, doctors take an oath requiring that they serve their patients. Lawyers abide by similar loyalty to their clients. In finance, some professionals are bound by laws and similar oaths to work on behalf of clients. Most are not. If you invest through a broker, or insurance agent, or anyone else who earns their income through commissions, you can do yourself a big favor by switching to a person and company you can trust.
Who can you trust? For one, a fiduciary. There are people out there who by law are legally obligated to act on your behalf. Certain financial planners and registered investment advisors are fiduciaries. Counselors at no-load mutual fund families and at discount brokerages are also often so classified.
Just as doctors and lawyers proudly display their credentials on the wall, ask whomever you talk with about their background. Why should you listen to them? And ask how they are paid. If they get commissions, consider finding someone else.
Since Congress avoided doing the right thing by not broadening the list of professionals who must abide by fiduciary standards, the task of finding good investment advice ironically became easier. Ruling out the full service brokers, insurance agents, and other commission seeking non-fiduciaries; limiting your choices to those who must work for you; the list of advisors you should even consider is vastly shorter. And better.
This article was originally published in Town Topics on April 21, 2010.
