The Dodd-Frank Wall Street Reform and Consumer Protection Act passed without requiring a universal fiduciary-duty rule. Such a rule would have required broker-dealers (Merrill Lynch, Morgan Stanley, UBS, Wells Fargo Advisors, etc.) to be held to the same standards as investment advisers. Now the SEC must interpret the law’s meaning.
The heart of the debate is the question of sales commissions. Broker-dealers argue it is possible to collect sales commissions and also give trustworthy advice. Other advisors and regulators in the industry believe an advisor’s vision is clouded once the investment choices include products paying large sales commissions, and that clients pay a heavy cost when dealing with a broker-dealer. Sales commissions are attached to most products utilized by broker-dealers, including load mutual funds, unit investment trusts, and most insurance products.
When determining the impact of sales commissions on investment advice, consider these questions:
Can a financial advisor recommend that a client invest in a mutual fund that pays a 5.75% commission to the advisor and still say that he/she is looking out for the client’s best interest?
What if the financial advisor knows the client can purchase the same mutual fund without a 5.75% sales commission? Can the advisor still sell the product, collect the commission, and say he/she is looking out for the client’s best interest?
Does not the charging of even a disclosed sales commission disqualify an advisor from acting in the client’s best interest if the sales commission alters the advice of the advisor?
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