Five years ago, the SEC launched a regulation for broker-dealers called Reg BI, which requires broker-dealers to act “as if” they are fiduciaries. That isn’t really what the regulation says, but it’s close enough. The actual language establishes a “best interest” standard — meaning the broker must “act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interests of the broker…ahead of the interest of the retail customer.”

Prior to Reg BI, brokers operated under a “suitability” standard, meaning that their recommendations had to be appropriate for the investor’s particular situation. But brokers were not required to disclose conflicts of interest, or consider superior alternatives. Even the definition of “suitable” was up for grabs for any given situation. The vagueness of the suitability standard gave investors very little protection from predatory brokers.

As long-time readers know, I believe people are generally better off working with financial advisors who are legal fiduciaries. But Reg BI raises an obvious question: If brokers are now required to put the investor’s best interest first, is the fiduciary standard still important? For several reasons, I continue to believe that most investors are better off working with an advisor who is a fiduciary.

In the world of retail financial advice, there are two basic operating models: the product sales model and the fee-for-service model. The product sales model is most common, though the fee-for-service model has been gaining popularity in recent years.

Fee-for-service advisors work for firms which provide a service (like financial planning, financial advice or investment management), not a financial product.

Advisors in these firms are paid to provide that service, much like how a CPA gets paid for providing accounting services or an attorney gets paid for their legal services. And like CPAs and attorneys, fee-for-service financial advisors do not sell financial products. They are fiduciaries, and operate under the fiduciary standard.

How strange would it be if your accountant or attorney earned revenue from a third party for selling you a product? That would be a clear conflict of interest and would violate the fundamental nature of your relationship. It’s the same way with financial advice and services. A product sales professional is fundamentally conflicted — even when they ostensibly put your best interest first.

The picture gets more muddled when product sales companies pretend they are fee-for-service advisors. The success of the fee-for-service model in recent years has prompted many brokerage firms to offer “fee-based” advice: the broker is allowed to charge you a fee for serving your account, sometimes in lieu of commissions.

But the broker and his firm may still be getting paid by a product company to put you in a particular investment. In other words, they collect from you and from a third party. There’s an inherent conflict of interest. Reg BI requires better disclosure of those conflicts, but working with a fiduciary allows you to avoid the conflict of interest altogether.

Fiduciaries bring other benefits. For example, fiduciaries are usually much more oriented toward long-term client relationships.

When a fiduciary makes a recommendation, you can generally expect them to be with you as the recommendation plays out. Fiduciaries also tend to be very transparent about their business and recommendations.

No matter what kind of advisor you are working with, take time to fully understand how they get paid and what their incentives are. Ask your advisor for a copy of their Client Relationship Summary (Form CRS). This is a document required by the SEC, so every advisor or broker-dealer firm has one. You can also find Form CRS on most advisor websites, usually in the links at the bottom of their main landing page. Form CRS is where advisors disclose fees, conflicts of interest, and other things, such as their revenue sharing arrangements with financial product companies.

Steven C. Merrell is a partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement or estate planning. Send your questions to Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to smerrell@montereypw.com.