Advisers' Legal Responsibility Blurred for Investors

Standards investors have for their advisers differ greatly from the standards advisers are obligated to deliver, according to Cerulli Associates.

Ignorance might be bliss for investors toward their advisers’ legal role. While investors report satisfaction of service from their financial professionals, investors do not understand the difference between fiduciary and suitability requirements, according to the latest The Cerulli Edge Advisor Edition. As Cerulli says, “It is hard to know if these satisfaction levels would remain so high if the investors were to more clearly understand the actual differences between a suitability standard and a fiduciary standard.’

According to Cerulli, a majority of investors believe that brokers and financial advisers are required to disclose any conflicts of interest they encounter. Citing data from the RAND Corporation, the report says 42% of investors believe brokers are obligated to act in a client’s best interest at all times. While many brokers of course do act in the best interest of their clients, they are not required to under suitability regulations, the report notes.

When broken down by type of financial adviser, more than half of investors believe that financial advisers or consultants are required by law to act in the client’s best interest, as well as to disclose any conflicts of interest (59% and 57%, respectively). The numbers are similar with financial planners (55% and 51%), brokers (42% and 58%), and investment advisers (49% and 62%).

Of course, the many different names for the category Cerulli broadly refers to as “financial adviser’ can confuse the financial industry and investors alike. The legal role of what investors call their financial adviser is not always immediately clear. Cerulli outlines the different fiduciary/suitability requirements, which might also be baffling, especially as the role of the adviser is evolving and merging. For instance, a dually registered adviser/firm (a rising category of adviser) is a fiduciary when conducting fee business and falls under suitability requirements when conducting transactional business.

No role appears to be overwhelmingly clear-cut, so it’s no wonder clients simply expect their adviser to act in the best interest of the client. The report summarizes the role of the investment adviser as: “Always put the best interest of the client first, and be sure to disclose any possible conflict of interest. However, these standards are not mandated at all times under FINRA’s suitability standards.’

In conclusion, Cerulli suggests that disputing the public’s widely held assumption that all variations of financial professionals are held to the same fiduciary standard would be counterproductive to the industry. Rather, the report says, the financial advisory profession should continue to keep the best interest of the client in mind and move toward making these expectations a reality.