Who Does Your Financial Advisor Work For?

Pop quiz: Who does your financial advisor work for? The easy litmus test is to take a look at the fine print on the bottom of his or her business card.

Is your financial advisor a fiduciary? Is he or she faithful to the client first, without conflict of duty?

Wall Street banks are protesting a new Labor Department proposal that would require their advisors to disclose something that most people have never understood. Unless investment advisors are truly independent, they owe their alliance first to the companies they work for.

That might seem obvious, but most consumers are oblivious to the difference between an advisor who owes his job to a company — the shareholders — and an independent advisor who owes his job (and his income) to his clients.

As an independent investment advisor, I know my job is to protect my clients from their worst financial instincts, to reach realistic goals and to sleep soundly at night. I’m not worried about the stock price of a large Wall Street firm, stock options or year-end profit bonuses.

I rarely agree with the “titans” of Wall Street, but here they have a point. The proposal is a bad fix for the wrong problem. It’s a sheep in wolf’s clothing. Implementing it may be a nightmare for the big banks, but, worse, I cannot see how it helps consumers. Consumers, it turns out, are confused about how money and investing really works.

If you feel like a consumer who is financially illiterate, give yourself a break. You are in the majority.

Not surprisingly, Wall Street is unhappy about the rule. It will make it harder for the big banks to rake in a hefty profit by selling their latest financially engineered products. It will mean stacks of paperwork for them as they defend their recommendations and try to keep from being held responsible if they fail.

Proponents of the proposal claim it will save investors money by limiting conflicts of interest. The goal is to keep advisors from recommending products that will earn them and their company the most profit at the expense of the investor.

For independents like myself, this proposed rule is one I’ve been living with and refining for decades. I’m happier getting paid for what I know — like plumbers and auto mechanics — than for what I can sell.

After watching Washington regulate the financial industry for nearly four decades, I can confidently predict that by the time Washington gets around to closing loopholes, the lawyers working for the big Wall Street firms will have already identified some new ones and engineered products to take advantage of them. Trying to regulate Wall Street is like trying to pick up a beanbag chair: squeeze one end and the other end gets bigger.

The real problem is not how to control Wall Street. The real problem is how to educate the public, and public officials, about how Wall Street really works, how financial products are designed, how much it costs to manage your money, and how to tell whether one investment is better than another.

There is a simple solution. When you hire a real estate broker or retain legal counsel you have to sign a simple disclosure. Why should Wall Street be any different?

The author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” John E. Girouard is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.

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