Who wins when your financial advisor sells you a product?

A column by syndicated financial journalist Humberto Cruz appeared in my local Sunday paper this week titled - at least in our paper - "Who wins when your financial advisor sells you a product?" (You can read the full text of the article on the Salt Lake Tribune website.) The dozen paragraphs are a must-read for anyone seeking advice from a financial professional.

The article uses a specific example from Edward Jones, but every other brokerage firm, bank investment arm and insurance company is the same in that its registered representatives are held to a suitability standard rather than a fiduciary one. This means that reps must be able to prove that their recommendations are suitable for a customer's situation. In contrast, registered investment advisors (RIAs) who are held to a fiduciary standard must make recommendations that are in their clients best interests.

As an example consider a person whose portfolio would benefit from having exposure to the large cap asset class. As long as a registered rep recommended a large cap fund he or she would be meeting the suitability standard, regardless of whether that fund cost the investor 0.25% or 2.25%. The registered investment advisor must recommend the large cap fund that was in the investor's best interests. This does not necessarily mean the lowest cost fund, but in most cases lower costs directly result in better investment options. But in the event that a more expensive fund makes the most sense, the RIA must be able to prove why that fund is in the investor's best interests.

To quote Cruz "In plain English: When brokers recommend a product, you can't be sure it's because it's best for you or best for them."