Should You Dump Your Broker Because of the Fiduciary Rule?
A new rule governing retirement accounts is a reminder of the different standards for brokers and registered investment advisers in other accounts
By Cheryl Winokur Munk
It’s time for investors to think again about what they want and what they can expect from the professionals who handle their accounts and give them advice.
Why now? Because a new Labor Department rule that began to take effect in June holds brokers to a fiduciary standard—meaning they have to act in the best interest of their clients—when offering guidance on tax-favored retirement accounts like 401(k)s and IRAs. Previously, the standard for brokers was less strict: They were required to offer only “suitable” guidance.
The new rule doesn’t apply to nonretirement accounts; brokers still only have to meet the suitability standard for those. And it doesn’t dramatically affect investment advisers registered with the SEC, who already were held to a fiduciary standard for all accounts in advising clients on how to invest. (One way it does affect them is by applying a fiduciary standard to their advice on withdrawals from retirement accounts.)
But the change still serves as a reminder of the differences in the rules governing brokers and registered investment advisers, making this a good time for investors to review their situation to be sure it’s the best arrangement for them.
Thanks to ample publicity surrounding the new rule, some investors may have come to associate a fiduciary duty with better performance and service. But industry participants say that isn’t necessarily the case. After all, having a fiduciary responsibility doesn’t guarantee a financial professional will dole out sound advice or generate stellar investment returns for clients, they say.
Here are some things investors need to understand as they decide whether to stick with their current situation or make a change.
Fiduciary isn’t everything
First, investors who aren’t certain of their broker’s or adviser’s fiduciary status can always ask. But that status alone shouldn’t be the basis for firing someone who has performed well for an investor in the past, industry watchers say.
Rather, they say the decision to maintain or end a relationship with a financial professional depends largely on an individual’s needs, past investment performance, fees and the professional’s regulatory history.
“It doesn’t matter whether he or she is a fiduciary or not. It’s all based on performance and what you’re paying to get that performance,” says Charles Field, a New York-based partner at the law firm Sanford Heisler Sharp LLP and co-chairman of the firm’s financial-services practice. “You wouldn’t keep your gardener if all your shrubs were dying. You’d get another one. The same thing should be true for your financial adviser,” he says.
Mr. Field suggests investors meet with their broker or adviser to discuss their portfolio’s performance, after fees, and how it compares with the appropriate benchmarks. Those who are worthy of an investor’s business will be transparent about their fee structure, he adds.
Another consideration is how much help the investor needs. “Part of the decision is: Do you need ongoing planning and advice?” says Jamie Hopkins, who co-directs the retirement-income program at the American College of Financial Services. Generally, advisers offer more comprehensive financial guidance than brokers.
Some investors may be better off with a broker who is paid by a commission on transactions than they would be with an adviser who is a fiduciary and is paid an annual flat fee or one based on account size. A fee-based model may be more expensive for some investors and of questionable value, especially for younger investors who don’t have a lot of money to invest and don’t require much advice. “At a certain point, it’s probably not even worth it” to pay an adviser who charges a fee, says James Choi, professor of finance at the Yale School of Management.
A broker can also make sense for certain buy-and-hold strategies—for instance, when buying bonds an investor plans to hold until maturity or accumulating stocks for the long term, says James Poer, chief executive of Kestra Financial, an Austin, Texas, firm that offers both brokerage and fee-based advisory services. In these instances, it makes no sense to pay a continuing asset-management fee, he says.
What are your goals?
On the flip side, for investors who have a sizable sum to invest or who need more continuing advice than their broker can provide, it could be more economical to switch to a registered investment adviser, says Ryan D. Brown, an attorney with expertise in finance and retirement planning who is a partner at CR Myers & Associates in Southfield, Mich.
“You have to align yourself with an adviser who meets with your goals and objectives. It’s a very individual decision,” he says.
Some brokerage firms offer both commission and fee-based services, so that’s another question to ask before making a switch, Mr. Poer says.
The decision-making process should also include a visit to BrokerCheck, a website maintained by the Financial Industry Regulatory Authority that gives a snapshot of a broker’s experience, licensing information and regulatory history. “You don’t want to do business with anyone who has a ding on BrokerCheck,” says Mr. Field, the Sanford Heisler attorney.
The Securities and Exchange Commission has a similar tool for registered investment advisers, at adviserinfo.sec.gov.
To be sure, the issue of having to decide between an adviser who is a fiduciary and one who isn’t may eventually be moot. If proponents have their way, all financial professionals eventually will be governed by the same best-interest standard, regardless of how they are registered or the types of accounts they service. The SEC continues to consider the matter and recently requested industry comments. Meanwhile, the Certified Financial Planner Board of Standards is attempting its own fix. It recently floated a proposal to expand the fiduciary duty to anyone holding the certified financial planner designation, which includes brokers.
Regardless of whether an adviser has a fiduciary obligation, investors always want to work with someone who has their best interest in mind, says Jamie Price, chief executive of Advisor Group, which owns four brokerage firms and a registered investment advisory and provides compliance and advisory services to independent investment advisers and their clients.
To determine whether that’s the case, he says, investors should ask a lot of questions and refuse to work with anyone—fiduciary or not—who doesn’t meet their expectations.
“The best advisers are very transparent about everything,” he says.