For the last couple of weeks there have been a number of stories in just about every one of the multiple information sources we now have to attempt to sort through to find out what is going on around us about something called a Financial Adviser rule. This rule was set to go into effect but it appears that the new Presidential administration is going to stop its implementation.
The proposed rule would have required that anyone providing investment advice to an individual would have to place that person’s best interest ahead of the adviser’s own interest. The idea that someone providing suggestions about what to invest in should put his client’s best interest ahead of his own is a somewhat radical suggestion in the open grazing versus barbed wire warfare that rages in the investor/banking community. Until this proposed rule was put forth the open grazing folks were pretty much in charge.
There is some serious misunderstanding, and perhaps just wishful thinking, among investors about the role, responsibilities and expertise of people who hand out investment advice. When someone tells you to give them $5,000 to invest in that “sure thing” you might want to think that they are giving you that advice so that you can make some money from the investment. Not necessarily. In fact they may know little or nothing about what they are telling you to invest in. They may be more interested in the fee they will “take off the top” of the $5,000 to pay themselves and add that to the fee they may get from the company they are recommending you invest in for telling you to spend your money for the company’s benefit. They may have some form of ownership interest in the company they want you to invest in, but have no cash invested in it themselves and are not exposed to any risk if the investment fails, but may have a financial windfall if they can get enough investors to put money into a venture. They may have a rather substantial amount of money invested in the company that they want you to invest in and know that without additional investors their financial loss could be quite large.
You may think that anyone who sets themselves out to be a financial adviser would tell you about any of these items of personal risk or personal benefit when they suggest you make an investment. Well, no,not really. Financial advisers have to worry about deliberate fraud, but generally speaking they are under no obligation to tell you, the investor, that they have some strong personal interest and benefit that comes to them if you invest in what they recommend to you. They are under no obligation to put your best interest ahead of their own best interest.
Equally interesting is the fact that any boob can set himself or herself out as a Financial Adviser. It is just as likely that the person calling you on the phone to give you the unique opportunity to get in on the ground floor for the manufacture of the newest technology in making candles barely made it out of sixth grade as it is that she has PhD in Economics. Even in the more rarefied atmosphere of a swank office downtown there are no required professional standards that can give you some comfort that the salesman suggesting you put a pile of your money into ABD Electronics has any special insight into ABD Electronics other than that he heard the company mentioned on a cable business channel last night.
The proposed rule would not solve all these possible problems with the services provided by Financial Advisers, most of whom try to do the best they can with what skills they have. Still, it would be nice to know that anyone providing you with investment advice had to, by law, put your interest above their own. This standard does not seem to be an unreasonable one to set. It rather seems like the decent thing to do. Perhaps one reason to be concerned with what some Financial Advisers do or don’t do when they are providing advice to their clients is the great hue and cry now taking place over establishing a legal standard that people providing financial and investment advice must put their client’s interest ahead of their own when making investment recommendations?
There is one thing you can do though to address this issue if the new proposed rule is in fact tossed in the trash. When you are looking for financial or investment advice and go to a Financial Adviser ask that person if they have in place a written policy about putting their clients interest before their own, and if not, would they sign such a simple agreement with you. If the answer to both those questions is no, whatever the rationalizations put forth for saying no may be, then you should move on to another FA who will say yes to those questions.