New Rule: Advisers Must Give Honest Advice

Photo (cc) by epicharmus

Update 7/15/10: The article below was written prior to final passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule discussed in the article below regarding investment advisers acting in a fiduciary capacity wasn’t included in the final bill – instead, the new law directs the SEC to study the issue for six months, then act according to the results of their study. For more information, see What Financial Reform Means to You.

After a contentious debate, the new financial reform legislation will include a provision requiring stockbrokers and other Wall Street advisers to provide advice in the best interests of their clients.

The obvious question: if investment advisers at Wall Street firms like Merrill Lynch are only now being required to do the right thing for their clients, what have retail investors been paying them for over the last century?

As it turns out, the little guys have been paying for a lesser standard, known in the industry as “suitability”. Investment recommendations made by retail stock brokers – often working on commission – had only to be suitable for the client, not necessarily in their best interests.

The duty to act in someone’s best interests is called a “fiduciary” duty.

Example: your broker calls and recommends you buy a particular mutual fund, and the mutual fund would generally fit your investment profile: it’s suitable for someone with your risk tolerance, tax bracket and investment objectives.

What you don’t know, however, is they’re recommending that fund because it pays them more commission and thus costs you more in fees than other similar funds. Under the old rules of suitability, that’s OK, because the fund recommended was suitable. But not under the new rules, because they know there are better choices, and thus aren’t acting in your best interests.

The fact that people being paid to provide you with objective advice for the last century weren’t required to do so is amazing. What’s more amazing is that many in Congress wanted to keep it that way – this provision barely made it into the final bill. Instead of simply requiring all investment advisers to give honest advice, some Wall Street-friendly Congresspeople wanted to just “study” the problem instead, effectively burying it.

From the Huffington Post:

The Senate proposal, pushed by Sen. Tim Johnson, Democrat from South Dakota, called for a study to examine whether brokers — middlemen between sellers and buyers of securities — should act in the best interests of their clients when peddling securities and investment advice. Investment advisers are held to this standard, known as a fiduciary duty. Yet brokers for Wall Street firms, even when performing the exact same function, currently are not.

Investor advocates blasted Johnson, and the Senate conferees negotiating the final financial reform bill, for adopting the proposal late Tuesday.

(Rep. Barney) Frank, however, was able to persuade Johnson and his Senate colleagues to support the House version of the same provision. Conferees from both chambers adopted the measure, ensuring its place in the final bill.

While this provision of the financial reform bill won’t take effect for six months after passage, it promises to bring big changes to Wall Street.

Imagine that: people who historically have been exceedingly well-paid for providing objective advice will soon actually have to do so.

What will they think of next?

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
5 Countries Where You Can Retire on $2,000 a Month or Less
5 Countries Where You Can Retire on $2,000 a Month or Less

These tips on retiring overseas come from someone who’s been helping American expats for decades.

Here’s the Average Retirement Age in Your State
Here’s the Average Retirement Age in Your State

Are you on track to retire at the same age as most residents of your state?

7 Effortless Ways to Make Extra Money
7 Effortless Ways to Make Extra Money

In the digital age, new ways of earning cash crop up all the time — and some require next to no effort on your part.

21 Thrift Store Gems You Can Cash In On
21 Thrift Store Gems You Can Cash In On

Here’s what to look for at that overstuffed thrift store — and how you can make money from it.

3 Costly Social Security Mistakes That Women Make
3 Costly Social Security Mistakes That Women Make

Women face unique challenges when planning for retirement and making these mistakes can result in a skimpier retirement.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

Am I Eligible for My Mother’s Social Security Benefit?
Am I Eligible for My Mother’s Social Security Benefit?

Can an adult daughter tap into her late mother’s benefit?

These Major Appliances Got the Worst Reviews in 2020
These Major Appliances Got the Worst Reviews in 2020

Consumer Reports says these home products got the worst ratings from experts.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

This Surprise Factor Can Raise Your Risk of Dementia
This Surprise Factor Can Raise Your Risk of Dementia

Nearly half of U.S. residents may face this threat.

Organize Your Home With These 10 Thrift Store Finds
Organize Your Home With These 10 Thrift Store Finds

Resolve to be clutter-free in 2021 with these secondhand purchases.

11 Laws You Could Be Breaking Without Knowing It
11 Laws You Could Be Breaking Without Knowing It

Seriously? Fibbing about the weather is a crime? This and other little-known legal traps await the unwary.

Is This Treatable Condition Causing Your High Blood Pressure?
Is This Treatable Condition Causing Your High Blood Pressure?

Researchers say too many doctors are overlooking this potential source of hypertension.

13 Things Seniors Can Get for Free — or Almost Free
13 Things Seniors Can Get for Free — or Almost Free

There are many ways to get cheap or free services and goods after reaching a certain age.

These Are the 3 Best Used Cars You Can Buy
These Are the 3 Best Used Cars You Can Buy

These vehicles boast reliability, safety and long-lasting value.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have all of these documents that are crucial to their golden years — especially during a pandemic.

3 Cable TV Companies Hiking Prices for 2021
3 Cable TV Companies Hiking Prices for 2021

Still married to your cable company? Hold on to your wallet!

Internet Providers Can’t Charge You for This Anymore
Internet Providers Can’t Charge You for This Anymore

Starting this month, your ISP no longer can bill you for this fee.

15 States With the Largest Homeless Populations
15 States With the Largest Homeless Populations

Some of the states with the highest rates of homelessness might surprise you.

11 Generic Products You Should Buy at Costco
11 Generic Products You Should Buy at Costco

Not all generics are worthwhile, but these are among the best from Costco’s Kirkland Signature brand.

8 Tips for Retiring Comfortably on Social Security Alone
8 Tips for Retiring Comfortably on Social Security Alone

It’s never too early to start learning how to live well while living on less.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

9 Small Expenses That Are Bleeding Your Budget Dry
9 Small Expenses That Are Bleeding Your Budget Dry

Keep more of future paychecks by eliminating these budget-busting unnecessary expenses.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.