Brokers soon obligated to put clients’ interests first
It may sound like a joke headline in The Onion, but right now, if you hire a broker to handle your investments, he or she isn’t required to put your interests before his or her own. The good news is that seems poised to change.
Last Saturday, the SEC released a study recommending that brokers abide by the same golden rule as investment advisors: Put the client’s interests first. (Last year’s financial reform law kickstarted this initiative.) It’s unknown yet whether the SEC will be able to turn their suggestions into action, but until then, here are a few things to keep in mind:
1. Brokers aren’t clairvoyant. There’s no evidence that advice from these would-be experts justifies the steep commissions they charge. And all brokers—who are salespeople, not stock analysts—generally make money by getting you to buy or sell stocks.
2. You can invest without a broker. Brokerage firms tend to sell funds with loads (commissions) and substantial fees, and their minimum investment requirements are usually high. Even if you go with a discount broker, there’s often some kind of fee involved. Instead, purchase investments through a low-cost mutual fund company.
3. If you feel compelled to use a broker, wait until this gets sorted out. I’ll keep you posted as I find out the latest news.
4. And then, stick with a discount broker. A typical transaction that would cost you on average $10 at a discount broker could cost $50 at a full-service firm. Also, full-service firms often charge annual maintenance fees of about $150 a year. Every year, SmartMoney ranks the best discount brokers—read it before you decide.
And heads up: We can expect to see more debate over the role that the SEC and other regulatory agencies should play in consumer issues like this, especially in the run-up to the Consumer Financial Protection Bureau‘s launch in July and beyond.
Do you use a broker? Would you consider hiring one if this issue is resolved?
