Is Your Broker Up to the Standard?

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. I'm here today with Harold Evensky. He is the president of Evensky & Katz Wealth Management. He's also very much a thought leader in the world of financial planning. So I'm excited to have Harold here today. Harold, thanks for being here.

Harold Evensky: Well, thanks. I'm excited to be here.

Benz: Harold, I know that you have been a big proponent of the financial services industry adopting a fiduciary standard for anyone purporting to be delivering financial advice. Can you talk about what that standard means?

Evensky: Yes, it's really about mom and apple pie. The regulatory environment for the brokerage industry is a business standard, a caveat emptor. You're kind of on your own.

A fiduciary is really some simple concepts. A fiduciary needs to place the interests of their client first. They need to eliminate any conflicts of interest that they can. And those they can't, they simply need to disclose and provide advice at a professional level.

So, really, I think that's what most investors expect of who they're dealing with. Unfortunately, that's not the rules of the law as they stand today.

Benz: So there are currently people who are not operating under a fiduciary standard. And the idea is that they have to simply be presenting investment ideas that are appropriate versus best.

Evensky: Exactly. The brokerage industry is held to what is called a suitability standard. It means the advice needs to be suitable. It doesn't need to be in your best interest. There may be all kinds of conflicts. And there's no requirement to, in effect, represent the investor.

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The concept is that if the advice is incidental to the sale, then the fiduciary standard doesn't apply. Unfortunately, people like myself think that's gotten kind of fuzzy. And what I'd call the "you standard."

If they say, "I want to buy AT&T," that's a brokerage relationship. What's the firm think of AT&T? Brokerage, no problem. What I call the "you standard" is, as soon as someone says, "Well, should I buy it?" and [the broker] then says, "Yes, you should," then a fiduciary standard ought to apply.

Benz: So this fiduciary standard was initially thought to be part of this financial reform bill that's been wending its way through Congress. Lately, we've been hearing in reports that the fiduciary standard may not be included. Do you have a sense of the state of the state?

Evensky: What happened is, the House proposal incorporates a fiduciary standard. The Senate proposal originally did, but at the last minute, there was a substitute to provide basically an 18-month study. That's still potentially up for debate. Unfortunately, that is in there now.

But the SEC, among others, have said, "We already did the study. We don't need a study. We think there ought to be a fiduciary standard."

So hopefully that will be changed. And if not, I believe that the SEC, and for that matter FINRA, are committed to moving in the direction of fiduciary standards for anyone providing advice.

Benz: So if it does not become part of this Senate bill, how would it play itself out in terms of something the SEC or FINRA might do?

Evensky: They can be more aggressive in interpreting what this "solely incidental" is, and narrow the opportunity to skate through this passageway.

But for any investor today, it's really very simple. All you have to do is ask whoever you're dealing with, "Will you put down in writing that you have a fiduciary relationship with me?" There's nothing to prevent a broker from having a fiduciary relationship. They're just not required to.

So it's real simple for anyone today. Just ask the broker, "What's the relationship? And will you put in writing that yours is, with me, a fiduciary relationship?"

Benz: So you think it's a stopgap barring any legislative action or any action from the SEC or FINRA? That's something investors should always ask for when seeking financial advice?

Evensky: I think they should always ask for it, absolutely--assuming they're looking for advice.

Benz: Right.

Evensky: If they just want transaction, no problem.

Benz: Right. Thank you, Harold, so much. Great information.

Evensky: Thanks.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.