The House Financial Services Committee passed the Investor Protection Act of 2009.
This legislation would have a meaningful impact on the sales of annuities and mutual funds as the current suitability standard would be replaced by a much higher fiduciary standard. The net effect would be a big win for financial services consumers.
Currently, suitability standards require that financial advisors determine whether a product is appropriate for a given client profile, with risk tolerance as one of the main criteria.
The new fiduciary standard would put advisors in the role of a fiduciary, requiring among other things that product sales are actually in the client's best interests.
Product costs and fees would come under increasing scrutiny under the new fiduciary standard.
The effects of the legislation would likely include elimination of certain more expensive share classes and a continued industry migration away from commissions and towards fee-based compensation.
Source: Marketwatch
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Anonymous replied on Permalink
Why a win?
Help me understand why these changes would be a big win for financial services consumers?
tom replied on Permalink
Fiduciary status is a higher standard
Fiduciary status introduces a legal obligation to put yourself into the shoes of a client and only do what is actually in their best interest.
This is much more stringent than suitability which basically boils down to: a) you gave us some basic info about yourself; b) we used this to create a sort of ambiguous risk tolerance and suitability profile, and; c) from there, it's pretty much caveat emptor for you as a customer.
Bottom line is fiduciary status better aligns the responsibility and incentives of advisor/client.
How could this not be a win for consumers?
Anonymous replied on Permalink
Isn't it still very subjective
I've heard this argument hundreds of times and still don't quite understand how by making you a fiduciary instantly makes someone turn from a salesperson to traveling 1000 miles in the clients shoes.
I have met dozens of Investment advisors that are "Fiduciaries", but believe that there managed accounts are always in the clients best interest when in fact given the clients situation they might benefit from an annuity.
I do agree that if you level the compensation then the incentive for selling one product over another somewhat disappears but does not necessarily remove bias that may have been ingrained over many years.
tom replied on Permalink
Agreed, but a step in the right direction
Very, very good point.
Fiduciary status is certainly not a panacea. Plenty of examples of advisors who do hang out a shingle as fiduciary who have skewed incentives (fee-based planners whose knowledge, business models and ultimately services are skewed towards assets under management versus annuitization is an example that comes to mind).
That said, incentives do work, and in my opinion someone who is legally obligated to represent best interests will generally be better aligned with their customer.
Anonymous replied on Permalink
Consumer Protection
Apparently, this bill also contains features that beef-up consumer protections with regard to annuity sales.
Anyone have details on this?
tom replied on Permalink
Consumer protections in House bill
Yes, apparently there are funds set aside as an incentive for states to adopt more stringent monitoring and prosecution of suspect annuity sales practices:
http://money.cnn.com/2009/11/15/news/economy/Congress_insurance/