Brokers are Not Fiduciaries

by | Oct 13, 2014 | Asset Management, News

You’ve probably heard or read us talk about the fiduciary standard we have to our clients here at Mullooly Asset Management. I read an article from the New York Times over the weekend that echoed a lot of the same sentiments we typically share here on the site.

The article begins by telling the story of an older couple, the Toffels, who went to a local bank branch for investment advice. As Josh Brown of The Reformed Broker put it, “Repeat after me: Brokers are not fiduciaries and no one in a bank branch is giving you ‘advice'”. Well put by Josh. The couple was invested in some low cost Vanguard funds before the bank branch got a hold of them. At the bank broker’s “advice” they liquidated those positions, paid capital gains taxes, and moved the money into annuities. Read more about our opinion on annuities here:

This older couple was sold text book examples of what we dislike about annuities: Loaded with annual charges and weighed down with surrender periods. Just one example of why you need to know if you’re working with an investment advisor who has a fiduciary obligation to you or a broker who calls himself an advsor. They do their best to blur the lines sometimes.

The article goes on to say:

Brokers, like those at the Toffels’ bank, are technically known as registered representatives. They are required only to recommend “suitable” investments based on an investor’s personal situation — their age, investment goals, time horizon and appetite for risk, among other things. “Suitable” may sound like an adequate standard, but there’s a hitch: It can mean that a broker isn’t required to put a customer’s interests before his own.

This creates a muddle for investors. Say you sit down with a broker — one who isn’t legally required to act as a fiduciary — and the broker has access to a dozen mutual funds, all of which are deemed “suitable” for a particular customer. The broker can recommend the most expensive fund, even if it makes him more money at the consumer’s expense and isn’t preferable in any other way, Professor Laby said.

The article does a fantastic job outlining the differences between investment advisors with a fiduciary standard and registered representatives, brokers, or whatever else they’re referring to themselves as these days. The bottom line is that investors need to be aware of who is giving them their advice, and what their motives are.


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