In the United States, physicians do more than uphold the Hippocratic Oath. They have a fiduciary duty to their patients. In other words, doctors are required by law to put the interests of the patient above their own.
Now, imagine if a group of American physicians argued that they should be exempt from this standard.
As the White House considers a proposal to expand the fiduciary standard to brokers and insurance agents, we are hearing exactly that argument when it comes to financial advice.
Given how much consumers stand to lose from questionable financial advice, it’s hard to believe that all advisors do not have to operate under a fiduciary standard already. Registered investment advisors and 401(k) plans, for example, are fiduciaries. Some professional designations, such as Certified Financial Planner, also carry a fiduciary promise.
In most states, however, brokers and insurance agents operate under the lower standard of suitability, under which an advisor cannot recommend an investment grossly out of line with the investor’s age, risk tolerance, or liquidity needs. The advisor can, however, recommend an expensive fund that pays him a commission, even when a cheaper fund exists.
We’ve explained again and again how high fees can decimate investors’ nest eggs. Those arguing against the fiduciary standard are effectively saying, “We can’t make enough money if we’re forced to treat our clients fairly.”
One possible argument against expanding the fiduciary standard could suggest that hiring a fiduciary is no guarantee that you’ll get good advice, and that it would make more sense to enforce the standards already in place before expanding them.
This argument doesn’t make sense. There are bad doctors out there, too, but no one seriously believes that lowering the standard of care for doctors would result in better choices or outcomes for patients.
The fact is, anyone who wants to hire a fiduciary can do so. Most investors, however, do not know what the fiduciary standard is or whether their advisor meets it. As the SEC puts it:
“Investors typically make no distinction between broker-dealers and investment advisers, and most are unaware of the different legal standards that apply to their advice and recommendations.”
This is particularly true when the advisor operates under the suitability standard. No broker will intentionally wear a button saying, “Ask me why I don’t put my client’s interests first.”
Whether they work for brokers, RIA firms, or insurance agents, financial advisors perform similar jobs and have significant influence over their customers’ livelihood. We should hold all advisors to a consistent standard of care: the fiduciary standard.
Terry Banet is SigFig’s Chief Investment Officer. With over 25 years of investment experience, Terry has held senior investment management and private banking positions at JPMorgan and USTrust.