I wrote an article back in November 2009 titled "The F word you need to know" that discussed why a fiduciary standard was being hotly contested among policy makers and lobbyist as part of the Wall Street Reform Bill. A fiduciary is someone who puts your financial interest ahead of his or her own. Fast forward eight months and we have The Wall Street Reform and Consumer Protection Act of 2010 that passed on July 15th, 2010. So what was passed that you need to know? If you guessed a mixture of nitrogen, hydrogen, carbon dioxide and methane, you are close. (http://en.wikipedia.org/wiki/Flatulence) Your interest and "protection" were essentially punted to a study.

In the 11th hour, Senator Tim Johnson of South Dakota inserted an amendment into the bill that removed a key cornerstone of consumer protection: The fiduciary standard. This amendment cut out a part of the original bill that would have required everybody who gives investment advice to the public to act as a fiduciary. Instead, Johnson effectively stalled the issue by writing language in the Act that requires that the SEC conduct a 6 month "study" on the effectiveness of existing standards of care for broker/dealers and investment advisors. I believe that the study is simply window dressing to give the appearance of performing due diligence on the issue. To wit, the SEC already has a 2008 Rand study that supports the fiduciary standard, and sausage language saying that the SEC is empowered but not required to impose a fiduciary standard.

Aside from the study, the Act states that brokers don't have a continuing duty to their clients--which might mean that the broker can offer a financial plan as a fiduciary and then sell the heck out of the client after the presentation: "The sale of only proprietary or other limited range of products by a broker or dealer shall not, in and of itself, be considered a violation of the ['40 Act RIA] standard."

The key issue

Registered Investment Advisors (RIA) and "Fee-Only" advisors believe that something called a "fiduciary standard" is the very best framework for professionals to work with clients. To act as a fiduciary means we professionals have to put aside our own financial interests, and also put aside the business/financial interests of any company we work for, and give recommendations that are solely and completely in the best interests of people like you, our clients. Most financial advisors are not held to this high standard. Rather, they're held to a "suitability" standard, meaning they're supposed to reasonably believe that the investment and insurance products they want you to buy are appropriate for your situation. Appropriate is a long way from "in your best interests".

Broker-dealers and insurance companies disagree with a fiduciary standard. They argue that their salespeople already have to adhere to rigorous regulations and that applying a fiduciary standard to them might prohibit them from charging commissions or limit the products that they can sell. As one broker/dealer spokesperson said "The group now has 'concerns about imposing the fiduciary duty and its unintended consequences on small investors.'" What is the unintended consequence about putting your clients' interest first? Simply put, lucrative commissions disappear.

Bob Veres, renowned financial columnist and editor of Inside Information, a newsletter for financial planners, offers some valuable insight about this debate. "Look at the motives of those who are in favor of a fiduciary standard, and at the motives of those who oppose it. Those in favor--generally the most informed consumers and members of the RIA community--have very little to gain, personally and professionally--from their advocacy. The astute consumer will find the fiduciary needle in a haystack regardless of the regulatory structure. RIAs are actually advocating for more meaningful standards imposed on professionals like them. The brokerage firms, meanwhile, are protecting extremely lucrative sources of revenues, including profit margins dramatically higher than most American businesses. I would argue that the SEC should give their arguments less weight in the fiduciary debate; not only are they predictable and self-serving, they are also visibly not in the interests of the retail financial customer."

In the Wall Street Journal column titled "Brokers Win, Investors Lose Key Reform," Jason Zweig writes "Securities salespeople generally aren't obligated to act in your best interest. They needn't tell you that they make extra money pushing one particular investment or that cheaper alternatives might provide you a higher return. Suppose two mutual funds are "suitable," but one of them pays the broker a fatter fee. You may well end up in that one-without finding out that your broker had an incentive to favor it."

What can you do?

Don't wait for the SEC to conclude its study. Come January, I don't think we will be any further along in "protecting" your interest. Rather, ask these questions that matter:

• Are you a fiduciary, and if so, do you have a fiduciary oath or pledge that you will sign?
• Will you provide written disclosure prior to our engagement, and thereafter throughout the term of the engagement, of any conflicts of interest, which may compromise your impartiality or independence?
• Do you receive any compensation or other remuneration that is contingent on any purchase or sale of a financial product?
• Do you receive a referral fee or other compensation from another party based on a referral of a client or a client's business?
There is a world of difference between a fiduciary selling investment advice and a broker selling investment products. Advisors are only as good as the advice they give. Fiduciaries stay in business by helping their clients reach their investment goals. Brokers, on the other hand, stay in business selling stocks, bonds, or funds and pocketing commissions. When it's your hard earned money, which relationship sounds better to you?

Andrew Brown is a Certified Financial PlannerTM and a Fee-Only Registered Investment Advisor.