When Elaine and Merlin Toffel, a retired couple in their 70s, needed help with their investments, they went to their local U.S. Bank branch. The tellers knew them by their first names. They were comfortable there.
So when a teller suggested that they meet with the bank’s investment brokers, the Toffels made an appointment. After discussions and an evaluation, the bank sold them variable annuities, in which they invested more than $650,000. The annuities promised to generate lifetime income payments.
“We wanted to make the most amount of interest we could so if we needed it to live on, we could use it,” said Ms. Toffel, 74, of Lindenhurst, Ill.
What she says they didn’t fully understand was that the variable annuities came with a hefty annual charge: about 4 percent of the amount invested. That’s more than $26,000, annually — enough to buy a new Honda sedan every year. What’s more, if they needed to tap the money right away, there would be a 7 percent surrender charge, or more than $45,000.
Michael Walsh, a spokesman for U.S. Bank, said that the investments were appropriate for the Toffels, that fees were disclosed and that the sale was completed after months of consultations. But the Toffels now question whether they were given financial advice that was truly in their best interests. Like many consumers, they say they didn’t realize that their broker wasn’t required to follow the most stringent requirement for financial professionals, known as the fiduciary standard. It amounts to this: providing advice that is always 100 percent in the consumer’s interest.
Many people think that they are getting that kind of advice when they are not, said Arthur Laby, a professor at the Rutgers School of Law and a former assistant general counsel at the Securities and Exchange Commission. “Brokerage customers are, in a certain sense, deceived,” he said. “If brokers continue to call themselves advisers and advertise advisory services, customers believe they are receiving objective advice that is in their best interest. In many cases, however, they are not.”
Brokers, like those at the Toffels’ bank, are technically known as registered representatives. They are required only to recommend “suitable” investments based on an investor’s personal situation — their age, investment goals, time horizon and appetite for risk, among other things. “Suitable” may sound like an adequate standard, but there’s a hitch: It can mean that a broker isn’t required to put a customer’s interests before his own.
There are some specific situations when brokers must act as fiduciaries — for example, when they collect a percentage of total assets to manage an investment account, or when they are given full control of an investor’s account. But under current rules, a broker can take off his fiduciary hat and recommend merely “suitable” investments for the same customer’s other buckets of money. Confusing? Absolutely.(...)
It's a bewildering situation for consumers, particularly as they try to figure out which advisers do follow a fiduciary standard: Investment advisers, who generally must register with the S.E.C. or a state securities regulator, must put their customers’ interests first, regardless of what accounts they are working with.
This creates a muddle for investors. Say you sit down with a broker — one who isn’t legally required to act as a fiduciary — and the broker has access to a dozen mutual funds, all of which are deemed “suitable” for a particular customer. The broker can recommend the most expensive fund, even if it makes him more money at the consumer’s expense and isn’t preferable in any other way, Professor Laby said.
On the other hand, if advisers are following a fiduciary standard, the proper course is clear: “They have to recommend the one that is the lowest cost” because that will be in a consumer’s best interest, he added.
by Tara Siegel Bernard, NY Times | Read more:
Image: Nathan Weber
So when a teller suggested that they meet with the bank’s investment brokers, the Toffels made an appointment. After discussions and an evaluation, the bank sold them variable annuities, in which they invested more than $650,000. The annuities promised to generate lifetime income payments.“We wanted to make the most amount of interest we could so if we needed it to live on, we could use it,” said Ms. Toffel, 74, of Lindenhurst, Ill.
What she says they didn’t fully understand was that the variable annuities came with a hefty annual charge: about 4 percent of the amount invested. That’s more than $26,000, annually — enough to buy a new Honda sedan every year. What’s more, if they needed to tap the money right away, there would be a 7 percent surrender charge, or more than $45,000.
Michael Walsh, a spokesman for U.S. Bank, said that the investments were appropriate for the Toffels, that fees were disclosed and that the sale was completed after months of consultations. But the Toffels now question whether they were given financial advice that was truly in their best interests. Like many consumers, they say they didn’t realize that their broker wasn’t required to follow the most stringent requirement for financial professionals, known as the fiduciary standard. It amounts to this: providing advice that is always 100 percent in the consumer’s interest.
Many people think that they are getting that kind of advice when they are not, said Arthur Laby, a professor at the Rutgers School of Law and a former assistant general counsel at the Securities and Exchange Commission. “Brokerage customers are, in a certain sense, deceived,” he said. “If brokers continue to call themselves advisers and advertise advisory services, customers believe they are receiving objective advice that is in their best interest. In many cases, however, they are not.”
Brokers, like those at the Toffels’ bank, are technically known as registered representatives. They are required only to recommend “suitable” investments based on an investor’s personal situation — their age, investment goals, time horizon and appetite for risk, among other things. “Suitable” may sound like an adequate standard, but there’s a hitch: It can mean that a broker isn’t required to put a customer’s interests before his own.
There are some specific situations when brokers must act as fiduciaries — for example, when they collect a percentage of total assets to manage an investment account, or when they are given full control of an investor’s account. But under current rules, a broker can take off his fiduciary hat and recommend merely “suitable” investments for the same customer’s other buckets of money. Confusing? Absolutely.(...)
It's a bewildering situation for consumers, particularly as they try to figure out which advisers do follow a fiduciary standard: Investment advisers, who generally must register with the S.E.C. or a state securities regulator, must put their customers’ interests first, regardless of what accounts they are working with.
This creates a muddle for investors. Say you sit down with a broker — one who isn’t legally required to act as a fiduciary — and the broker has access to a dozen mutual funds, all of which are deemed “suitable” for a particular customer. The broker can recommend the most expensive fund, even if it makes him more money at the consumer’s expense and isn’t preferable in any other way, Professor Laby said.
On the other hand, if advisers are following a fiduciary standard, the proper course is clear: “They have to recommend the one that is the lowest cost” because that will be in a consumer’s best interest, he added.
Image: Nathan Weber
