Suppose you need legal advice. And suppose you have a choice between two attorneys, A and B. You know that Attorney A is required by law to do everything within her power to make sure you get the very best advice available to help you solve your legal problem. Providing legal advice is A’s main business, and she is required to serve your interest with undivided loyalty, obedience, confidentiality, reasonable care and skill, full disclosure, and full accounting.
Further suppose that you know that Attorney B is not required to operate under the same strict rules as Attorney A. Attorney B operates under rules that say that the legal advice he provides is only “incidental to his main business, which is preparing legal documents like wills and trusts. And if the advice is “incidental,” he doesn’t have to exercise the same standard of care to ensure that the advice he gives you is the best you can get.
If you do business with A, you have “protections” under the law which you don’t have if you do business with B.
Thankfully, you don’t have to make these distinctions with attorneys. They are all required to serve your interests in the same way, adhering to the fiduciary principles noted at the end of the first paragraph. Every person who uses the services of an attorney has these protections under the law.
Unfortunately, current law does not hold all Financial Advisors to the same legal standard when it comes to the work they do for their clients. Some financial advisors (Registered Investment Advisors) are held to the fiduciary standard like Attorney A, and some (Stock Brokers) are like Attorney B. So consumers face the problem of trying to identify who can provide them with these important legal protections and who does not. How did this confusing situation develop?
In 1999, brokerage firms were essentially granted an “exception” to the fiduciary standards rule after arguing that the advice their representatives provide is purely “incidental” to their main business of buying and selling financial products (mutual funds, stocks and bonds, annuities, etc.). This exception, known as the “Merrill Lynch Rule,” is the crux of the problem and results in consumers being served by “Advisors” who operate under two distinctly different sets of rules.
This is why the Financial Planning Association (FPA) sued the Securities and Exchange Commission in June of this year. The FPA and others believe that all consumers should receive the same uniform protections under the law. Arthur Levitt, Jr., the former SEC commissioner, also favors a review of the Merrill Lynch Rule, saying, “Brokers and advisors should be bound by similar fiduciary standards.” And Mercen Bullard, assistant law professor at the University of Mississippi and president of Fund Democracy, a pro-investor group, noted, “There’s no question that investor protections are far stronger for clients of (registered) investment advisors than for clients of brokers.”
Barbara Roper, director of investor protection for the Consumer Federation of America, said, “Brokers call their sales reps by titles that imply they are advisors. The real issue is the SEC’s failure to enforce the requirement that brokers limit themselves to ‘solely incidental’ advice in order to escape regulation as advisers.”
You can do a preliminary check on your Advisor by going to www.SEC.gov and clicking “Check out Brokers and Advisers.”