By Eric Smith, J.D., CEO of DTC and President (and an investment advisor representative) of Trustee Empowerment & Protection, Inc., an SEC-registered investment adviser
An investment advisor is, by law, a fiduciary. This means that he or she is subject to a statutory duty to act in his or her clients’ best interests.
A stockbroker, in contrast, is under no such legal duty. All that is required of them is that what they sell be suitable for the buyer who, in the rules governing the sales activity of stockbrokers, is referred to as a customer, not a client. It’s an important difference.
Why? It’s important because a broker can sell a customer a mutual fund which might actually be better for the broker and his or her brokerage firm than for the customer to whom it is sold, as long as it is a suitable investment for that person.
In the competition between mutual fund companies, many, financially and in other ways – reward those who preferentially recommend and sell their funds rather than others.
Yes, that’s obviously a conflict of interest.
Unfortunately, such conflicts of interest are quite common within the vendor-dominated financial services marketplace. They can, and too often do, result in potentially significant opportunity costs when the customer or client – you – are unaware that the sale or recommendation was motivated such incentives. You wind up investing in poorer performing funds than might otherwise have been possible.
And while this problem appears more prevalent within the brokerage world, investment advisors are also approached with such incentives by vendors hoping that they too will preferentially recommend their mutual funds.
But surely we can count on government regulators to protect us individual investors from being taken unfair advantage of in this way, can’t we? Well, they try.
In fact, the U.S. Department of Labor, tried to issue and enforce a fiduciary rule that would have required investment advisors and brokers to ensure that what they were recommending and selling to clients and customers were best for them regarding retirement-related investing.
Financial services firms sued to block the rule and they won, successfully preventing that protective rule from being implemented.
More recently, the SEC has issued and is implementing a new regulation, Reg. BI (“BI” = “Best Interests”) and is requiring investment advisors and brokers to provide you with a “Customer Relationship Summary” (Form “CRS”).
Both, among other things, require that the existence of conflicts of interest be disclosed but, even then, these are typically general statements and not detailed explanations of how those conflicts of interest could specifically harm you.
Importantly, you need to understand that conflicts of interest still exist and still too often operate to degrade customers’ and clients’ investment results.
Moreover, if virtually everyone is disclosing potential conflicts, what good does that actually do? Has anything meaningfully changed? Are you now somehow better protected?
Sadly, the answer is No.
In fact, the SEC makes it clear that the disclosures should be considered a “starting point” for you as an individual investor to ask further questions to determine whether that broker and/or advisor is right for you.
But do you know what to ask? And could you tell whether or not that answer is truthful?
While efforts are being made, the truth is you’re on your own. So, what can you do?
You can use Rita to help protect you from such conflicts of interest – disclosed or hidden.
How can Rita do this?
By enabling you to pick and weight the performance factors most important to you, Rita will objectively and transparently score and rank all of the available mutual funds and ETFs in any covered asset class.
And Rita will do this in a manner that best matches your individual needs, goals, and preferences.
Disclosures or not, truthful answers or not, it won’t matter. Rita will enable you to identify those that have proven best over time at a producing the composite investment effect that best matches the investment results you hope to achieve.
Now, with Rita, if a broker calls to sell you a mutual fund, you can simply enter the fund’s name or ticker symbol, then select and weight the factors you believe are most meaningful to you, and immediately see how it ranks against all other, similar choices.
If it’s a poor performer, you’ll instantly know it and likely won’t get it.
In this way, Rita effectively filters out all conflicts of interest and enables you to protect yourself today in a way no regulator can.
With Rita you can confidently identify and select what you believe is truly best for you.