BULLS & BEARS: Read the fine print to identify conflicts

July 24, 2006

Let's say you need advice and you are going to pay a fee to someone to provide sound, unbiased counsel on any number of s u b j e c t s - f r o m plumbing to taxes.

After you meet with the kind, presentable and seemingly competent adviser, you decide to use his services. The adviser's contract has a lot of small print, like all contracts do. But before you just sign it, you heed your dad's warning to "always read the small print."

Then you come across this passage:

"Our interests may not always be the same as yours. Make sure you understand your rights and our obligation to you, including the extent to disclose conflicts of interest and to act in your best interests. We are paid by both you, and sometimes by people who compensate us for what you buy."

Reread that and ask yourself this: Couldn't all of this influence objectivity?

"Why might my accountant's interests not be the same as mine?" you wonder.

Or maybe you are thinking, "If Mr. Plumber is getting paid to use the PVC he is suggesting, instead of copper tubing, might he be influenced to recommend PVC?"

Wouldn't you prefer a plumber who would recommend the best solution to your leaky pipes instead of the solution that paid him more? How about your financial advisers, whom you are paying to provide retirement planning or money management guidance-wouldn't you want their interests to be the same as yours?

Sure you would, but guess what? The above disclaimer came directly from the Web site for a fee-based account from a major brokerage firm.

There are two distinct types of financial advisers: independent registered investment advisers and those we used to call stockbrokers. Nobody is called a stockbroker anymore, but instead have titles made up of a combination of the words: financial, investment, adviser, consultant, etc.

"Big deal," you say, "I know my broker is getting paid; nobody works for free, so what's the difference?"

Registered investment advisers have a legal fiduciary duty to act in their client's best interests at all times, whereas brokerage firms generally are not held to the same fiduciary standard.

An RIA must give a client a document describing exactly how, how much and by whom they are paid, as well as disclose any conflicts of interests they may have.

Brokerage firms are not required to provide customers with any comparable disclosure.

According to a recent study commissioned by Nebraska-based brokerage TD Ameritrade, 84 percent of investors want Congress to set uniform standards for investor protection and fiduciary responsibility for both brokers and RIAs.

Why wouldn't anyone want transparent regulations that are fair for advisers, brokers, and, most important, investors like you?

Three weeks ago, the Securities and Exchange Commission began a study to try to reduce the investor confusion.



Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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