The old dairy marketing campaign, “got milk?” is taking on new meaning. Apparently the Food and Drug Administration (FDA) wants to make sure consumers can accurately answer this question. They recently indicated they would begin restricting use of the word “milk” to only beverages that come from cows. While this change will likely have little benefit to consumers, similar restrictions on who could use the label “financial advisor” would greatly benefit them.
It’s no secret that the FDA is motivated in the milk labeling issue not by concern over consumer confusion, but by complaints from the dairy industry, whose profits have been hurt by the proliferation of plant-based drinks such as soy, almond, and rice milk. Even if there were confusion about these “milks”, consumers are unlikely to be harmed by it.
On the other hand, consumers are harmed on a daily basis by the confusion around who is a true financial advisor and who is actually a broker or sales agent. Brokers, sales agents, and Registered Investment Advisers (RIAs) are held to very different legal standards in terms of their obligations to clients and their disclosure requirements. RIAs are considered fiduciaries, meaning they are always required to act in the best interest of their clients. Additionally, they are required to fully disclose the amounts and sources of all their fees on an annual basis. In contrast, brokers and sales agents are only required to give advice that is suitable to the client, not necessarily what is best.
This means they can legally put their own financial interests before their clients. Also, their disclosure requirements are not as stringent. As a result, many of their clients have no idea the true costs they are paying. Despite these differences, many brokers and sales agents call themselves “investment advisors” and “financial advisors”, and it is perfectly legal for them to do so.
The costs to consumers arising from this confusion are greater than you might imagine. We recently met with a couple that had been working with an “advisor” at a well-known investment bank for many years. As they prepared for retirement, they sat down with this “advisor” to discuss their plans. The “advisor” recommended they withdraw money from their company retirement plan to pay off their mortgage. The withdrawal from the retirement account was entirely taxable and caused them an enormous tax bill. This was completely avoidable as they had other funds available to pay off the mortgage without the tax consequences. Had they been working with a fiduciary advisor, they would have saved tens of thousands of dollars. And yet, the website of this well-known investment bank says, “With the right financial advisor standing beside you, you can have peace of mind and confidence to pursue your financial future,” and talks about “advice you can trust”. These clients didn’t question the recommendation because they thought they were working with an advisor who was looking out for their best interests. Unfortunately, they weren’t.
Sadly, this story is not unique. Many RIAs shared similar stories in a recent edition of Inside Information, an industry newsletter. Many, if not most, RIA clients have worked with a broker or sales agent at some time in the past. This gives RIAs a firsthand look at the damage done to clients by non-fiduciary advisors. RIAs commonly see clients who have been sold products with high commissions and poor performance, products that don’t meet client objectives but lock them in with large withdrawal penalties, and strategies that cause unnecessary taxes or give up valuable tax deferral.
It would certainly help if only fiduciaries could call themselves advisors. But, this is unlikely to happen. Instead, the Securities and Exchange Commission is considering a new disclosure form to help investors understand the differences between advisors, brokers, and agents. However, they admit it will be some time before anything goes into effect. In the meantime, one sure way to know you are working with a true advisor is find one through the National Association of Personal Financial Advisors (NAPFA). To learn more, go to NAPFA.org.
It turns out “got advice?” is an important question to consider.