Wall Street Journal columnist Karen Blumenthal’s opinion that investors should trust only registered investment advisers and distrust broker-dealers is shortsighted.
No empirical data show that advisors who operate under a fiduciary standard are more trustworthy or honest than those who operate under a suitability standard.
If, like our late President Ronald Reagan, you prefer to “trust, but verify,” a broker-dealer may in fact be the way to go. Where we do have empirical data, they show that most B-Ds and/or their registered representatives undergo regulatory examinations at least every two years. Carlo di Florio, the director of the SEC’s Office of Compliance and Examinations, has stated that the SEC was able to examine only 9% of RIAs in budget year 2010 and one-third of RIAS have never been examined.
Furthermore, a NAIFA survey found that our members, who are predominantly broker-dealers and registered reps, each spend nearly $9,000 and 514 work-hours annually to comply with existing consumer-protection regulations. They are subject to strict licensing and continuing education rules. The suitability standard requires them to thoroughly examine their clients’ needs before making recommendations.
And despite the rhetoric, RIAs are not free of conflicts of interest. While they may not receive commissions, most are compensated based on a percentage of a client’s assets under management. One could argue that RIAs have incentive to keep a client’s money close to home rather than recommending savings or insurance products that would reduce the client’s portfolio under management.
More importantly, though, most NAIFA members are small business owners who operate in their own communities. They build lasting relationships with clients based on trust, integrity and customer service. They rely on their good reputations for the repeat business and referrals that keep their firms going.
More than any regulator-imposed standard of care, this long-standing tradition of quality service ensures their trustworthiness.