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President Obama Seeks New Rules for Brokers

The White House has called upon the Department of Labor to hold financial brokers and professionals to a higher Fiduciary Standard. The Fiduciary Standard is a simple yet important concept. Simply put, when advisors act as fiduciaries, they are placing clients’ interests ahead of their own financial benefit. The recent publications by the White House on this topic are dramatizing the way advisors interact with clients, and a little background on the subject might help.

There are generally two ways a financial advisor gets compensated: fee or commission.

Advisors receiving a commission can be compensated with an upfront load, a back-end commission, or a piece of the ongoing management fee an investment product may charge on an ongoing basis. As it stands currently, these commission-based advisors or brokers are required to sell their clients suitable products and are not required to act as fiduciaries.

Advisors that are fee-only do not charge a commission whatsoever. Instead, they charge a fee as a percentage of the assets they manage on behalf of the client. These types of advisors are known as Registered Investment Advisors (RIA), and they are already held to a high Fiduciary Standard by FINRA and the SEC. Financial Synergies is proud to be a fee-only RIA.

The financial services industry has been slowly moving in the direction of fee-only, but it is still widely dominated by commission brokers. Those are the brokers the President has trained his sights on.

“I am calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interest of their clients above their own financial interests,” President Obama said. “It is a very simple principle. You want to give financial advice? … You can’t have a conflict of interest.”

The conflict of interest President Obama is referring to is the sales commission the commission-based broker receives when recommending an investment product. The concern is that the conflict occurs when the broker recommends the product that pays the highest paying commission, not necessarily the best product for the client.

Ken Bentsen, president of the Securities Industry and Financial Markets Association, said President Obama’s announcement was “just a lot of politics into what is a very serious matter.” The Financial Services Institute, a broker trade group warned “imposing a fiduciary standard on all advisors could raise the cost of providing financial advice and price some smaller investors out of the market.”

At the other end of the spectrum, both the Financial Planning Association and the Certified Financial Planner Board of Standards, Inc. issued statements that applauded the news and expressed their shared belief that all financial advisors who provide financial planning advice should abide by the fiduciary standard.

The lines have been drawn and the stage has been set. Stay tuned for a long and spirited debate.

Mike Booker

Mike has enjoyed meeting with existing and prospective clients over the years, helping build Financial Synergies into the firm it is today. He counsels clients on many complex areas of financial planning and investing, helping them to achieve their long-term goals and simplify their lives. Mike has earned three top-shelf credentials: CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant® and Certified Fund Specialist®.   Read Mike’s Profile HereRead More Articles by Mike

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