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My view: Financial advisors should follow a higher standard

Published: Sunday, Oct. 20 2013 12:00 a.m. MDT

There is a higher standard in the industry called a fiduciary standard in which the advisor has a duty of care and a duty of loyalty exclusively to the investor — not himself. (Shutterstock) There is a higher standard in the industry called a fiduciary standard in which the advisor has a duty of care and a duty of loyalty exclusively to the investor — not himself. (Shutterstock)

Are you one of thousands of Utahns who thinks your investment advisor or broker acts in your best interest?

Think again.

You and millions more across the U.S. may not know that brokers, including those who work for big Wall Street firms, insurance agents and scores of private investment advisors only have to meet a suitability standard when using your money for investment strategies. This means they have a greater obligation to sell products from companies they represent, rather than find the best way to grow your money. Instead of an investment advisor, you may be working with a salesman.

Why should this matter to Utahns who have already hit retirement age — some 250,321 people, according to 2010 state statistics? Or the 10,000 Americans who reach that milestone daily — as well as those in their late 40s and 50s? Because suitability standards can erode a retirement plan by as much as two-thirds, leaving those golden years not so golden.

This astonishing fact was disclosed by none other than John Bogle, CEO of Vanguard — the world’s largest mutual fund company — in a recent PBS "Frontline" story. He said fund operators and brokers take huge chunks of money out of every retirement account, fees that are often hidden in the fine print of account agreements. Said Bogle to "Frontline": “Do you really want to invest in a system where you put up 100 percent of the capital, you take 100 percent of the risk and you get 30 percent of the return?“

There is, however, a higher standard in the industry called a fiduciary standard, in which the advisor has a duty of care and a duty of loyalty exclusively to the investor — not himself. But only 15 percent of all investment advisors practice under this standard.

The Securities and Exchange Commission and the Department of Labor want to make the fiduciary standard universal. Not surprisingly, much of the financial services industry has lobbied hard against the proposed regulations. And some in Congress have voiced concern that such rules could actually make it more costly for low-income or middle-income investors to get professional investment advice. New, revised regulations are expected to be released sometime this year by the Department of Labor, and the SEC is continuing to refine its plan, which is expected out in 2014.

Since 85 percent of all investment advisors and brokers adhere to the suitability standard, the lion's share of those who work in the industry stand to lose what Jason Zweig of the Wall Street Journal called “a legal kickback.” Considering that over the past two decades Americans have poured $10 trillion into the financial services industry, there’s a lot at stake.

One way to bring greater daylight to the issue might be to look to the lessons learned from the decades-long national anti-smoking campaign that first began in the 1960s when the surgeon general linked smoking to lung cancer.

The tobacco industry continued to operate, but consumers were warned on cigarette packages about the dangers of smoking and Congress pumped millions of dollars into research as well as persuasive billboards and TV and radio ads. Results from a recent three-month national TV campaign showed 100,000 smokers had quit. Education and persuasion were the chosen methods of government involvement.

We believe full transparency, rather than more government regulation, is the right approach here and should be the norm adopted by the financial services industry — with a nudge from the government.

Every investor should be entitled to an “investment bill of rights” that requires all financial advisors and brokers to disclose, in writing and in advertisements, if they are acting under a fiduciary or suitability standard. Other “rights” would oblige investment advisors to disclose if they have professional licenses; if they are registered investment advisors; if they have an ADV (an SEC or state regulators registration form), and all conflicts of interest.

We will be making this case not only to professional organizations such as the National Association of Insurance and Financial Advisors and the Association of Professional Financial Advisors, but members of our own Utah congressional delegation. We urge all Utahns who have investments — large or small — to ask their investment advisors whether they practice under the fiduciary or suitability standard.

Todd Kim and Greg Roumpos are co-founders of Galileo Financial Group, a South Jordan-based wealth management company that adheres to a fiduciary standard.

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