The Broker Shell Game on the Fiduciary Issue

04/14/2015 05:02 pm ET | Updated Jun 14, 2015

There's no way to sugarcoat this. The position that brokers and their powerful lobbyists take on the "fiduciary issue" is nothing short of a flim-flam. Here's everything you need to know to avoid becoming a victim.

Why Using a Fiduciary Is Important

Every registered investment advisor (RIA) is a fiduciary to their clients. They have a legal obligation to place the interests of their clients above their own. They can only recommend investment products that are in the best interest of the client.

Brokers and insurance companies are not fiduciaries to their clients. Their legal obligation is a much lower one, called the "suitability" standard. Under this standard, brokers can recommend investment products that pay them a fat fee, even though lower-cost products with higher expected returns are available, as long as that recommended product is deemed "suitable."

The Consequence of Conflicted Advice

This is not a debate about semantics. The failure to select a financial advisor who has a true fiduciary obligation to you can have devastating consequences.

Joseph Peiffer is the president of the Public Investor Arbitration Bar Association (PIABA), an international bar association whose members represent investors in disputes with the securities industry. In a compelling post, he recounts some touching stories of clients who entrusted their life savings to a broker, under the mistaken impression that the broker was looking out for their best interest.

These investors believed it when their brokers told them they would take good care of their retirement nest egg. The reality was quite different.

Peiffer recounts the story of a New York retiree who lost 75 percent of the life savings he entrusted to a disreputable broker. He was left with so little to live on that he couldn't afford a $15 fishing license. Other clients who received conflicted advice ran out of money early in their retirement, leaving them "just above the poverty line."

Some of Peiffer's clients were so financially devastated that they had to move in with their children or relocate from their house to "a trailer in a friend's backyard." In one case a broke investor had no alternative other than to rent a room in the home of his ex-wife. In another case a blue-collar worker retired from his $80,000-a-year position at a major corporation. He received conflicted advice from his broker. He ran out of money before he was eligible for Social Security and was reduced to taking a job stocking vending machines at his former employer's offices for $10 an hour.

The Ugly Side of the Brokerage Industry

When brokers are soliciting your business or "servicing" you as a client, they likely say and do everything possible to convey the impression they have your best interests at heart. The massive advertising budgets maintained by major brokerage firms only reinforce this impression.

According to a report prepared by PIABA, here's how UBS represents itself to investors:

Until my client knows she comes first. Until I understand what drives her. And what slows her down. Until I know what makes her leap out of bed in the morning. And what keeps her awake at night. Until she understands that I'm always thinking about her investment. (Even if she isn't.) Not at the office. But at the opera. At a barbecue. In a traffic jam. Until her ambitions feel like my ambitions. Until then. We will not rest. UBS.

A reasonable (if not the only!) interpretation of this advertisement is that UBS places the interests of its clients above its own.

The report goes on to include advertisements by a number of other major brokerage firms, all similar in nature.

But when investors lose money due to the conflicted advice from their brokers, things get ugly. According to Peiffer, his clients were not aware that their broker could provide conflicted advice with impunity. When they institute arbitration proceedings to recover their losses, "the brokerage firms always deny that any such 'fiduciary duty' to avoid conflicted advice exists."

Take Action Now

There's a simple remedy for this problem. Don't do business with brokers who will not confirm in writing that they are fiduciaries to you. In my experience, brokers will not make this representation and instead will try to persuade you that the "fiduciary issue" is a red herring.

Don't be fooled. It's a really big deal.

2014-04-01-Hiresfrontbookcover.jpgDan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham. He is a New York Times bestselling author of the Smartest series of books. His latest book is The Smartest Sales Book You'll Ever Read.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

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