President Obama is backing the Department of Labor’s (DOL) redraft of the rules governing financial industry professionals, and he’s gearing up for a battle. At issue is the glaring gap between two different standards that govern advice provided by various “financial advisors.” This highlights a crucial distinction that everyone needs to consider when looking for help with their investments. “Financial advisors” is in quotes because it is a common catch-all term that lumps together two very different classes of investment professionals.

Industry regulators clearly distinguish between “broker-dealers” (stockbrokers) and “investment advisors.” The governing legislation and oversight agencies define a broker as “any person engaged in the business of effecting transactions in securities for the account of others.”  Brokers are held to a suitability standard, which simply means that they must recommend investment strategies or products (annuities, mutual funds, etc.) that are considered suitable for their clients. If you think that’s a pretty watery standard, it is. With thousands of investment products available, many would be considered “suitable” for most investors. Financial products that come with the juiciest sales commissions or trailing commissions might be recommended as particularly suitable. Peloton and other investment advisors (a.k.a. registered investment advisors or RIAs) are held to a fiduciary standard, which requires us to put our clients’ interests firsts – all the time. This eliminates conflicts of interest inherent with the suitability standard, particularly with regard to commissions and expenses.

Fiduciary duty vs. suitability standard. It may seem like a subtle distinction, but it is not. The problem is that most investors believe that all “financial advisors are already fiduciaries and therefore required to put their interests first (i.e., adhere to the more rigorous of the two standards). They are not. The long-standing suitability standard allows financial pros to push higher commission product(s) out of a plethora of “suitable” products including annuities, mutual funds, separate-account platforms, etc. in order to boost their commissions.

The DOL, now with the President’s endorsement, is proposing to hold all financial professionals to the higher fiduciary standard. If President Obama gets his way, everyone will be required to put your interests first. That’s unlikely to happen, however, because brokerage firms will fight vigorously. The change would force the retooling of an entire industry built on a sales and distribution model.