(NJ) How can you tell whether your investment advisor places your interests above his/her own?
The only absolute and sure-fire way to know is to ascertain whether he/she owns up to being what is called a "fiduciary".
When anyone acts as a "fiduciary", they are required to place another's interests above their own.
The assumption in this regard is that one a person is more advantaged than the other. For example, a parent might be considered a fiduciary when making decisions affecting a child. In this case, the investment advisor generally has more knowledge and experience in dealing with investments than clients do.
With regard to investment advisors, a fierce fight has been carried out in public, in the courts, and behind the scenes, among the players in the financial services industry --including brokers and advisors as well as the SEC (U.S. Securities and Exchange Commission) and many others. That fight, in a nutshell, is whether to require all financial advisors to be considered fiduciaries and to be held to that highest of standards. The fight has been years long and hard.
For decades, brokers have been held to a "suitability" standard because ostensibly any investment advice they provide is incidental to the sale of investment products. On its face, that is clearly not the way it works. But investment sales persons have hidden behind the protection of that old law (called the Merrill Lynch exemption) for decades.
In recent years, the fight became public when President Obama's Executive Order required that investment advisors for retirement plans act as fiduciaries. It seemed like that would become the law of the land for all other investments also, but that's not what happened. The SEC and the federal government did not step up.
It seems that all is not lost here, as the State of New Jersey is picking up the cudgel according to the October 22, 2018 "Investment News" (IN), who reported that "The State's Bureau of Securities issued what it called a notice of pre-proposal that would subject brokers, agents, investment advisors and investment advisors' representatives to a fiduciary duty when providing investments recommendations to clients."
It goes on to say that "The Bureau believes that this uniform standard protects investors against the abuses that can result when financial professionals place their own interests above those of their customers."
New Jersey is acting because federal regulators have not done enough to raise advice standards...The pre-proposal argues that a uniform fiduciary standard will "reduce investor confusion and harmonize regulatory enforcement and that a regulatory gap exists that leaves investors often unaware of whether and to what extent those they trust to make financial recommendations are receiving undisclosed financial benefits in exchange for steering their clients to certain products."
It is interesting that New Jersey is not alone in pre-empting the SEC by moving toward a state fiduciary standard for investment advisors: Nevada enacted a fiduciary duty law in 2017, which has yet to be promulgated while awaiting some definition on whether the SEC will step up.
Note that this action by NJ is only a first step--it is a call for comment before specific regulations are developed and put in place. But it is a critically important first step, and it is heartening that our state is taking the lead in this important direction for investor protection. The comment period on this proposal ends December 14, 2018. Two sessions to hear public comments were scheduled in Newark on November 2 and 19, 2018.
It seems to many that the question of whether all investment advisors should be fiduciaries is rhetorical - of course, they should!
But many in the industry lobby against the possibility. When President Obama's Executive order on retirement plans became the law of the land, the financial services industry began accepting that as fait accompli and had a couple of years to adjust and comply. So, the industry has already geared up to the possibility. What are investors to do in the meantime? Just ask your investment advisor if he/she is a fiduciary.
Believe me, because of the ethical and legal implications and obligations that go with that job, few will want to fess up to being a fiduciary if they are not a fiduciary. The answer to this question will at least let investors know where they stand so they might act accordingly.
For me, it's good to know that our state of New Jersey is taking the lead in protecting investors.
