Investors told Securities and Exchange Commission staffers that proposals that are supposed to help consumers understand if they’re working with a broker or a registered investment advisor are downright confusing.
Investors who attended investors roundtables in Atlanta and Washington, D.C., met directly with SEC staff to express their opinions on the SEC’s best interest and customer relationship summary proposals -- specifically to give feedback on whether the proposals are effective in helping them understand the different legal standards of care brokers and advisors must provide to investors. Brokers operate under a suitability standard while advisors are held to a fiduciary standard and must put their clients’ interests first at all times. Confusion and conflicts of interest inflicted by financial professionals have cost retirees some $70 billion in hidden fees, according to the General Accounting Office.
The specter of such conflicts and hidden costs bother Brian Smith, an AARP member and retired Naval officer from National Harbor, Md., who attended the SEC roundtable in Washington, D.C. Smith said the investor consensus at the meeting was the SEC proposals’ use of the term “best interest” to describe brokers’ standard of care is “very misleading and confusing.”
“There was significant concern over the SEC saying that brokers are acting in a customer’s best interest as opposed to an advisor acting as fiduciary,” Smith said after the roundtable. “That is very confusing and misleading, since using best interest implies a fiduciary relationship. Most people understand fiduciary, but saying someone is acting in your best interest when they may well be acting in their own best interest is just misleading,” Smith added.
“A lot of folks reiterated these points. No one disagreed,” he said of attendees at the roundtable.
Getting it right is critical for the SEC as retirees increasingly rely on their 40l(k)s and 403(b)s, according to Smith, who said it bothered him that conflicted advice costs retirees some $70 billion. “If instead that money was invested at a 10 percent return if would have doubled over 10 years. That’s so important to retirees who are trying to keep investments working for us and growing so we don’t outlive it,” he said.
“There are significant pitfalls out there where financial advisors may not place our interests above their own. For folks like me who don’t deal with these topics frequently but maybe engage a financial advisor -- to use a generic term -- once or twice in our lives, it’s critical we understand the legal relationship and all the types of fees,” Smith said.
He and other investors at the roundtable asked the SEC to ramp up fee disclosure, he said. “There was a lot of discussion asking the SEC to ensure there is full disclosure of fees, especially with regard to broker-dealer charges. … Even with things like trail commissions, where a broker advises you to hold on to, say, a mutual fund, he’s still being paid,” Smith said.
Asked if he thought the SEC would listen to the cacophany of investor concerns, Smith said: “One can always hope. I applaud them that they had a public meeting. I applaud them for receiving the information and hope it makes it into the final rule. We owe it to ourselves to maintain close scrutiny of the outcome of this,” he added.
AARP executives, who have been active in providing feedback to the SEC, have encouraged members like Smith to attend all of the SEC roundtables.