With the Fourth of July fast approaching, I am reminded of the many benefits of independence, especially independent investment advice. You would think that independent advice would be any adviser’s highest calling. Surely our mission should be to aggressively avoid direct or indirect conflicts of interest, so we can freely employ any funds or investments that best suit our clients’ needs.
Investors should expect this highest level of care from their adviser, and they should ignore recommendations made by any firm that won’t look at all the options available in the marketplace. Yet, I routinely see conflicts of interest from advisers that restrict their clients to a limited investment list.
When I was a broker during the 1990s, the firms I worked for encouraged us to sell their proprietary mutual funds. Many competing funds were more appropriate and lower cost, but we were told to recommend in-house funds first.
Suitable Vs. Individual
This sounds improper, but it is not a breach of the suitability standard that governs a broker’s advice. The liberal suitability standard allows a broker to sell in-house financial products as long as the broker can show that they are suitable for a client based on the circumstances. However, being suitable for a client is decidedly not the same as being the best available choice for that individual.
By law, a broker is not a Registered Investment Adviser (RIA), so they do not fall under the stricter fiduciary standard that RIAs must follow. The fiduciary standard is a much higher standard of care than suitability. As described by the Securities Industry and Financial Markets Association (SIFMA), “Fiduciary duty includes both a duty of care and a duty of loyalty. … [T]hese duties require a fiduciary to act in the best interest of the customer, and to provide full and fair disclosure of material facts and conflicts of interest.”
A disturbing new trend in the advisor industry is to limit investment options for clients. When I see a firm restricting its investment recommendations to only its own proprietary funds or limiting portfolios to only exchange-traded funds (ETFs), I must question whether these decisions are in the best interest of clients. These are the elements of a suitability standard, not a fiduciary standard.
