Clients do need fiduciary protection

By DAVID MOON, Moon Capital Management, LLC
July 14, 2013

One of the many problems with the investment advice industry is that we do a poor job of serving the smallest investors, those who are sometimes the least sophisticated about investments. These people are the most vulnerable to the legal, but destructive conflicts and nuances in our business.

They pay higher fees and are more likely to work with advisers who aren’t even required to act in their best interests.

And sadly, there is a segment of our industry working to maintain this system.

There are lots of people who wear “financial services industry” hats, yet depending on how they are registered and regulated, they may not be required to place your interests above theirs.

Some other advisers are registered and regulated in a way that requires them to act as fiduciaries, that is to always act in their clients’ best interest, placing the clients’ interests ahead of their own.

These fiduciary advisers, however, are least likely to want to work with the smallest clients.

If you have less than $100,000 to invest, you are most likely to end up with a non-fiduciary adviser, someone who isn’t required to act in your best interest.

The Securities and Exchange Commission (SEC) is exploring some long-overdue regulations that would implement a uniform fiduciary standard for all retail investment advice, requiring that anyone providing investment advice must act in their clients’ best interests. That is, they must act as a fiduciary.

Registered representatives are held only to a “suitability standard,” meaning that they can sell any product to a client as long as it is suitable for that individual – even if it isn’t the best choice for the client.

Registered investment advisers are fiduciaries, meaning that any product they recommend to a client must be in the client’s, not the adviser’s, best interest.

Most clients don’t know if their advisers are registered representatives, registered investment advisers or registered sex offenders. There is even an entirely different set of regulations and requirements for banks and trust departments.

Some people in the investment industry prefer the current bifurcated system.

The National Association of Insurance and Financial Advisors (NAIFA) just released a survey of its members opposing a fiduciary standard for registered representatives, claiming that small investors would be hurt if the SEC required all advisers to act in their clients’ best interests.

They argue that if registered representatives were forced to adopt a fiduciary standard, the advisers’ costs would increase, which would be passed onto their clients. Or they would simply refuse to work with smaller clients.

Let me see if I get this straight: these guys are arguing that it cost more to sell the most appropriate products to their clients? Hardly.

But a fiduciary standard does tend to place clients into products with lower fees – that is, lower compensation for the adviser.

Fifty-three percent of the respondents to the NAIFA survey report that a majority of their clients have securities totaling less than $100,000. They are the clients who most need fiduciary protection.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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