S.E.C. Tells Brokers to Work for You, but Don’t Skip the Fine Print

When you go to the doctor, there’s an expectation that she will act in your best interest. You don’t expect to be prescribed costly pills because the office is getting a commission from the drug company, when a healthier diet will do the trick.

The next time you get a financial checkup or make an investment, there will be new rules about what you can expect from your investment professional. But the rules shouldn’t necessarily give investors the comfort of a doctor-patient relationship.

The changes made by the Securities and Exchange Commission on Wednesday are voluminous — one rule change alone takes up 771 pages — but the agency said they would help ensure investors get advice they can count on.

Not everyone is convinced. Consumer advocates say the changes have weakened the standards governing one class of financial professionals while giving an unwarranted veneer of trustworthiness to another.

Here’s what investors need to know.

The most notable changes involve the rules for financial brokers and investment advisers.

Brokers — technically known as registered representatives — are licensed to sell mutual funds, stocks, bonds and other financial products to retail investors. Investment advisers are paid to provide financial guidance.

Under the old rules, brokers were generally required to recommend investments that were “suitable” based on a customer’s characteristics, like their age, goals and tolerance for risk. Investment advisers have been held to a higher standard: fiduciary duty, which means always putting their customers first, in part by eliminating conflicts of interest or at least trying to mitigate them.

The new rules say that brokers cannot put their own interests ahead of their customers’ — an arguably higher standard than suitability, which experts say still falls short of saying customers come first. They also offer a new interpretation of the fiduciary duty standard: Investment advisers merely have to disclose conflicts of interest, not avoid them.

That disclosure provision is important: Advocates believe financial professionals will be able to rely on disclosure — potentially buried deep in paperwork — to profit at clients’ expense.

One common example: A brokerage firm may receive money from a mutual fund provider through a practice known as revenue sharing. A broker could favor those funds over a lower-cost alternative when making a recommendation. This type of activity would be considered to be in your “best interest,” advocates say, as long as it’s disclosed.

“Regardless of whether you work with a broker dealer or an investment adviser, they are not going to be required to recommend the investments that are in your best interest,” said Barbara Roper, director of investor protection at the Consumer Federation of America.

Sometimes brokers look like and act like advisers — as when they help people plan for retirement or save for college.

The new regulations have widened a loophole for brokers when they offer advice on meeting those goals. If the advice was “solely incidental” to their service as a broker and they didn’t receive special compensation for the advice, they don’t have to act as fiduciaries — something that will now be easier to do. It also means they don’t have a duty to monitor your account, so you might not get a heads-up if things go off track.

There are exceptions: Brokers with authority to move your money around without your permission are considered advisers, under the law, and the same goes for brokers who collect a regular fee to manage your money.

This puts the onus on customers to understand who they’re working with and how those financial professionals are compensated.

The safest course is picking an independent, fee-only adviser who makes an explicit promise to act as a fiduciary.

Fee-only pros are not compensated when they sell you something. Instead, they will receive a flat fee, an hourly charge, or payment calculated as a percentage of the assets they manage for you. It’s clean and transparent.

Another option: certified financial planners, a professional designation with rigorous curriculum and experience requirements. They pledge to act as fiduciaries when providing financial advice and can lose their designation if their self-governing board discovers they have not.

You can find these types of professionals through the following associations: The Garrett Planning Network, the National Association of Personal Financial Advisors and XY Planning Network. Roboadvisers — which provide automated advice, sometimes with human help — are another alternative.

If the brokerage firm that your adviser works for will not permit them to use their certified financial planner credentials, that is a huge red flag.

Then there’s the ultimate test: Ask your advisers to sign a fiduciary pledge, which states that you expect them to put your interests first all of the time, with all of your money, in all of your accounts.

Any disputes you have — with brokers and advisers alike — are likely to be settled in arbitration anyway. But having a signed pledge in your back pocket, experts have said, can only bolster your case.

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