Santa Monica, California - There is one thing that wealthy investors want most in their financial life: trusted advice.
And a new ruling by a US court of appeals makes it more apparent where rich people can get advice they can trust.
The US Court of Appeals for the District of Columbia ruled on March 30 that the Securities and Exchange Commission doesn't have the authority to allow some brokers to sidestep regulation as investment advisers. The court's ruling makes all brokers fiduciaries, and increases their responsibility and liability to clients.
The ruling could also force billions of dollars in assets to be transferred from fee-based brokerage accounts into traditional brokerage commission or advisory accounts because many brokers won't be deemed "investment advisers" anymore.
Investment advisers adhere to a different set of standards than the transaction-oriented broker, or registered representatives, as they are known in the financial-services industry.
Appropriate advice
Investment advisers are mandated to provide advice that is in the best interest of a client. They can't recommend an investment product strictly for the purposes of a sale.
Rather, investment advisers have to take into account an investor's entire financial planning scenario and give appropriate advice.
Registered representative brokers, however, could until now sell investment products that were in their best interest (say a higher-paying commission product) instead of in their client's best interest.
This is probably why more wealthy people have chosen investment advisers to manage their money. Can you trust that a broker employed by a large Wall Street brokerage firm is selling you the right type of investment product for your portfolio or are they merely trying to make a buck?
In myriad surveys wealthy individuals have ranked trusted advice as their No. 1 "want" from financial-services providers. One study, conducted by Chicago-based Spectrem Group, found that Americans with a net worth of $5m or more are increasingly turning to these "objective" financial advisers for financial planning.
A majority surveyed said they intentionally avoided financial advisers affiliated with a brokerage, bank, insurance or mutual fund company because of fear they might receive biased advice.
Clearly the appellate court ruled in favour of clarifying the roles of financial intermediaries to ward off this type of inherent bias too.
Brokers, according to the new ruling, would be made into what amount to glorified order takers and allowed to facilitate transactions; they couldn't render advice.
With advisory role comes responsibility
The brokerage industry says this is doing the client a disservice because brokers can offer advice on whether some products may be more appropriate or better than others and they should be allowed to speak up. However, the brokerage industry doesn't want the liability that goes along with the role of dispensing that advice.
There's a reason for that, and wealthy people have understood this for a long, long time. Trust is a key word to them, and it isn't subjective.
Investors deserve clear and informed investment advice from their brokers, no matter what sort. And they should be able to trust that advice.
The line that is being kicked around in the sand has to do with what constitutes financial planning. The brokerage industry claims that advice on investment products isn't financial planning, while the financial-planning industry claims that any and all advice is financial planning.
Financial planners claim investors get confused over what is a little bit of advice versus a lot of advice - and hence what is a fiduciary role. They also claim that brokers having been allowed exemptions to becoming fiduciaries, which they were until the court's ruling, put planners at a competitive disadvantage.
If the brokerage industry bucks the new ruling, which is a good bet, then people should look for investment advisers who are fiduciaries.
That's what the Financial Planning Association wanted when it filed a lawsuit against the SEC to clarify advisory roles, the long-running suit that the DC appeals court ruled on.
It should be a wake up call for investors, rich or poor: Use brokers who are willing to take responsibility for their actions and advice.