The next time you go to a financial consultant for help with your investments, you may receive a document that is supposed to make it easier for you to figure out whether that person is truly out for your best interests.
But there's a risk that after you've read it, you will be more confused than ever before. Read the document like a cigarette label. In essence, it is warning: "This broker might be hazardous to your wealth."
It won't read that way, however. Instead, it begins with: "Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours."
You will be receiving the document because the Securities and Exchange Commission has mandated that brokers who charge you a fee hand it out. It's the latest effort by the SEC to deal with the confusion that has arisen in the investment business in the last few years, as brokers have increasingly attempted to cast themselves as financial advisers.
For more than six years, financial planners, brokers and advisers holding a mixture of titles have been wrangling over what you should be told about a financial consultant's role when you seek help. Certified financial planners, who have extensive training in financial planning and must pass a rigorous test, haven't liked the intrusion of people who lack such training into their field.
They, along with consumer groups such as the Consumer Federation of America, have called on the SEC to do more to help people understand when they are receiving credible investment help. They argue that brokers have taken on an array of fancy titles to create the illusion that they are out to advise clients, but are actually salespeople in disguise.
Brokers, for their part, say that even though they aren't held to as a high a standard as other advisers, they're still looking out for their clients' best interests.
Hal Tearse, a financial consultant with RBC Dain Rauscher in Minneapolis, said providers of investment advice should explain in detail what they do for clients and how they are paid.
Too often, he said, financial consultants claim to be giving advice to people and then put everyone into identical investments. Those working for fees, he added, often are busy attracting clients initially and then let years go by without following up with clients on advice. This was especially damaging to clients during the bear market in 2000 to 2002.
"People have to ask more questions," he said. "It's fair to ask, `How do you get paid?'"
He said he tells clients in dollars - as well as percentages - all fees and commissions.
Critics, however, say brokers are often paid to sell. They make more money and even receive rewards such as trips if they sell certain investments, annuities or insurance products. They also can be penalized if they don't meet certain sales quotas.
All of this means their advice may be tainted - geared more toward selling an expensive product than a lower-priced one that would be better for a client.
Brokers are sometimes induced with sticks. For example, a couple of years ago Massachusetts regulators alleged that if brokers in one Morgan Stanley branch office didn't sell certain funds, the manager would punish them by withholding travel and entertainment reimbursements, or even firing them.
"Ninety-nine percent of the time when a person gets advice they assume that the person is acting in their best interest," said Barbara Roper, director of investor protection for the Consumer Federation of America.
But under current SEC regulations, brokers don't have to give clients their best advice even if they call themselves "financial consultants," "financial advisers," "wealth advisers," or an array of other titles they have assumed to bolster their credibility, she said.
"Some will give good advice, but a lot will give bad advice," Roper said.
That's why the consumer group has been calling on the SEC to change its rules so that anyone who acts like an adviser is required to live up to more rigorous standards.
Under current laws, certain advisers - such as certified financial planners or any registered investment adviser - must adhere to a high standard of behavior. They are considered a "fiduciary" under the law, which means they have to put their clients' needs first.
But brokers - even ones calling themselves financial planners - don't have to live up to that standard if they don't provide clients with comprehensive financial planning. They can provide some advice, but not everything from retirement planning to estate planning.
They aren't supposed to defraud investors, or sell them "unsuitable" products, but that doesn't mean they can't sell a higher-priced mutual fund when a cheaper one would do better, Roper said.
