One of the goals following the financial crisis has been to implement a uniform fiduciary standard for investors.
That is essentially fancy language for requiring financial professionals to provide advice in their clients’ best interests. Currently, all registered investment advisors are required to act as fiduciaries. Brokers-dealers follow another rule, known as the suitability standard, which is considered less rigorous. That means that as long as the investment is appropriate for you, they can recommend it.
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But investments that are just suitable can be much more expensive for the investor, said Patti Houlihan, president and CEO of Houlihan Financial Resource Group and a member of the Committee for the Fiduciary Standard.
For example, you could have a choice between two similar funds, and one could have a much larger expense ratio, or costs associated with running the fund, compared with the other investment.
A financial professional following the suitability standard could put you in the more costly fund. If they were adhering to the fiduciary standard, they would not, Houlihan said.
But coming up with one fiduciary standard for the industry has been slow. The SEC first published a study on the subject in January 2011.
Though the SEC was authorized to propose a rule, the Labor Department pushed ahead with its own version that would have applied solely to retirement accounts. That regulation, however, was scrapped last year.
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