Conflicts of Interest and Full Disclosure

Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits and our salespersons’ compensation may vary by product and over time.

The referenced disclosure, commonly known as the Merrill Lynch Rule after one of the leading broker-dealers in the U.S., was proposed by the Securities and Exchange Commission (SEC) as an alternative to enforcing the law requiring that those who provide investment advice for a fee must register as an investment adviser. The Financial Planning Association (FPA) eventually sued the SEC to force them to enforce the Investment Adviser’s Act of 1904 and to require the broker-dealers providing investment advice for a fee to register. The FPA eventually won their case and the SEC withdrew the conflict of interest disclosure requirement.

The conflict of interest problem still exists today. Both the Department of Labor (DOL) and the SEC are involved in heated disputes regarding the need for a universal fiduciary standard that would require that anyone providing investment to the public would have to always put a customer’s or a client’s financial interests first.

While it would seem that such a requirement is simply common sense and fair, the financial services industry claims that such a requirement would result in financial advisers refusing to provide advice to certain segments of the public and that such a requirement would result in disaster for investors. To date, the financial services industry has failed to produce any hard evidence of such claims, basing their claims on pure speculation.

The conflicts of interest issue has recently been addressed in an excellent article, “Is Your Financial Advisor Really Putting You Before Profits.”  As the article states, studies have consistently shown that the public mistakenly believe that anyone proving investment advice is required to put the customer’s best interests first. As the conflicts of interest disclosure points out, that is not true. Fiduciaries, such as investment advisers, are required to always put a customer’s best interests first. Stockbrokers and other financial adviser are generally not considered to be fiduciaries and there are allowed to, and often do, put their financial interests ahead of their customers’ best interests.

The key for investors is to recognize and understand the conflicts of interest issue and to take the time to review and evaluate any and all investment recommendations for the potential impact of same on them. To that end, I have previously published one of my proprietary metrics, the Active Management Value Ratio 2.0™, (AMVR) which allows an investor to perform a simple cost/benefit analysis on actively managed mutual funds to determine the cost efficiency of a mutual fund.

The information needed to calculate a fund’s AMVR score is available for free online. Once an investor becomes acquainted with the AMVR calculation process, it should take no more than a few minutes to calculate a fund’s AMVR score. Surely, one’s financial security is worth their investment in such a minimum amount of time.

Unfortunately, as Mark Twain once noted, the adoption of a law does not guarantee that everyone will follow it.  The power of greed will probably result in some financial advisers continuing to put their own financial interests ahead of the best interests of their customers. Therefore, the need for investors to be able to independently evaluate any investment advice they receive will continue to be a valuable skill.



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