Will Brokers Become Fiduciaries?

The Labor Department is contemplating overhauling the standard of care owed by brokers to their clients. Under the new plan, brokers would owe their clients a “fiduciary duty” which means they would be required at all times to give advice that is in the best interest of each client. Under the current “suitability” requirement, brokers can meet their legal obligation by giving advice that is merely consistent with a client’s risk tolerance and current circumstances, but that advice need not be in the best interest of the client. An immediate implication is that brokers can (and often do) direct clients to investments that are appropriate from a risk perspective, but may carry higher than necessary fees. (As an aside: Financial advisors employed by registered investment advisory (RIA) firms already owe a fiduciary duty to clients.)

What are the implications for consumers? Forcing the higher level of duty on those who provide financial services should be a positive move. Many consumers have been harmed by the current system, partly due to ignorance – a lot of people aren’t even aware that brokers don’t have to give them the best advice. Ideally, the proposed changes will do away with such confusion. Consumers will have greater certainty regarding the obligations of all retail financial advice providers.

It is expected that the brokerage industry will continue to fiercely contest any upcoming changes. The main thrust of their counterargument is that a higher level of duty will lead to higher fees (to compensate for the additional regulatory burden). This is the typical argument made by such firms whenever regulations are debated. The bottom line is that today people are paying too much for not very good advice. Paying too much for better advice is at least a step in the right direction. I would also argue that brokers are paid too much, so there is room in the system for better advice and lower fees.

Do you have a question about financial advisors and/or brokers and their standards of care?




    are any advisors willing to provide services for a fixed dollar amuont, for example, agree to accept a flat $200 for their services?

      Yuval Bar-Or

      Yes, some advisors will offer services at an agreed-upon flat fee. This will often be calculated by applying an hourly rate to some time commitment estimate. In the interest of realism, note that most fixed fee arrangements come with much higher price tags than the $200 mentioned in your original question. For example, a financial plan may range from $500 to $3,000, depending on complexity. Asset management fees offered by fixed price advisors may be $1,500 or $2,000 annually. I.e., if you only have $50,000, paying $2,000 is a murderously high percentage rate (= 2,000 /50,000 = 4%), so this type of arrangement is only a good deal if you are investing several hundred thousand dollars at a fixed cost of $2,000.

      Yuval Bar-Or

      Yes, there are advisors who will do this. Try looking for those who describe themselves as financial planners.


    Is there someplace I can check a financial adviser’s past record? I’m specifically referring to whether the individual has committed any infractions, received a lot of complaints, etc.

      Yuval Bar-Or

      You can access FINRA’s Brokercheck: http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/
      According to the FINRA site:
      “BrokerCheck is a free tool to help investors research the professional backgrounds of brokerage firms and brokers currently or formerly registered with FINRA or a national securities exchange, as well as current or former investment adviser firms and representatives. BrokerCheck information is drawn from filings by regulators, firms and investment professionals. It includes current licensing status and history, employment history and, if any, reported regulatory, customer dispute, criminal and other matters. It should be the first resource investors turn to when choosing whether to do business or continue to do business with a particular firm or individual.”
      For consumer reviews you could also try some of the more popular sites such as Angie’s List.


    How can I tell if the person I’m working with is or isn’t a fiduciary?

      Yuval Bar-Or


      1. The first step is to ask: “Will you be serving as my fiduciary? Are there any circumstances under which you may not function as a fiduciary?” The latter question is especially important because increasingly, financial professionals have multiple licenses. This means that for certain services they may act as fiduciaries, but may only have a suitability requirement for other activities (e.g., acting as a broker who charges commissions for buying and selling securities on your behalf or selling insurance).
      2. Ask to see their ADV brochure, which is a document financial advisors are required to maintain and deliver to prospects and clients. It should detail their compensation mechanisms, along with other important info. If the person can’t provide an ADV, he is likely a broker (or a financial advisor who is breaking the law).
      3. Take a look at the marketing materials: websites, business cards, letterhead, etc. Brokers, including those who are multiple-registered as financial advisors and brokers, must present verbiage along these lines on their websites, business cards, etc: “Registered Representative of and Securities & Investment Advisory Services offered through MyBroker Inc. (MBI). Registered Investment Advisor, Member FINRA/SIPC.”
      If the person describes herself as a “registered representative,” “representative,” or “rep,” she is a broker.
      4. Ask whether the provider is “fee-only” or “fee-based.” The former (fee only) is generally a fiduciary, who is only compensated by you in the form of a financial advisory fee – the provider does not receive payments from anyone else for services rendered to you, (e.g., does not receive commissions from a mutual fund company for selling you its mutual funds). The latter (fee-based) is generally an indication that the provider acts as a broker (or is licensed as both a financial advisor and broker)
      5. Ask, “what type of account are you opening for me?” the two choices to look out for are: advisory account or brokerage account. The latter suggests the person will function as a broker. A provider with multiple registrations could open two accounts for you: an advisory account and a brokerage account. When transacting in the former, a fiduciary duty may apply, while only the suitability duty may apply to transactions in the latter.

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