September 2, 2011 Comments (0) Blog, Securities Fraud

The Difficult Balance Between a Financial Advisors’ Fiduciary Duty and Pushing Their Own Products

(Last Updated On: July 17, 2015)

Andrew Haigney recently wrote an interesting article for businessinsider.com where he called investment advice “one of the greatest scams of our time.”

His motivation for writing his article was to expand on the theme of Yale University’s Chief Investment Officer David Swensen’s August NY Times Opinion piece about mutual funds where he called for an increase in investor education and “call[ed] for retail brokers to be held to a fiduciary standard.” Swensen expressed his concern that retail brokers selling mutual funds failed to show investors how the funds they were selling matched up against low-cost index funds.

Haigney feels the problem of fiduciary duty to the client versus a desire to sell products that are favorable to the broker’s firm and bank accounts extends beyond just mutual funds. He says that the problem is that “Investment advice has become a ‘product,’ and investment advisers steer prospective clients right into their own products.” This is a huge issue according to Haigney because “the point of sale” is where investors get their investment information and advice. He cites a 2008 SEC study that “found that 95 percent of investment advisory firms with individual clients also provide proprietary portfolio management services for individuals” and says, “firms make their money through portfolio management services, not dispensing investment advice.”

A firm giving investment advice has a fiduciary responsibility to give advice in the best interest of the client. But, as Haigney notes, “how often at the end of a sales presentation do you think investment advisors…tell a potential client that they may be better off going to a larger firm with more experience…or, as Mr. Swensen suggests, explain to a prospective lucrative client that their investment objectives can be better met by investing in a low cost index fund?” Haigney makes the obvious point that it is extremely difficult to fulfill fiduciary obligations and please your employer when the “name of the game in asset management is to get money in the door and start generating fees.”

Under securities regulations, registered advisors and brokers are required to uphold a fiduciary standard and advise their clients to invest in products that are suitable for each investors’ unique circumstances. If a financial professional fails in these duties to their clients, those failures may be actionable under current securities regulations and the investors may be able to recover losses.

For the full text of Mr. Haigney’s article visit http://www.businessinsider.com/investment-advice-is-one-of-the-greatest-scams-of-our-time-2011-9

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