Can you trust investment advice?
(Joe Raedle, Getty Images)

Where do you turn for investment advice -- and how do you know you can trust that advice? That's the challenge faced by a generation of Americans who are now rolling their company retirement plans into IRAs. The financial services industry is ready for them, teeming with offers to manage their money, sell them products and plan their retirement income. Unfortunately, too often those services do more to provide for the agent's or broker's own retirement than the client's!

The dollars involved are huge, with more than $11 trillion currently in employer sponsored plans, according to Spectrem's 2015 Market Insight report. And there's an additional $5.4 trillion already in individual retirement accounts (IRAs). That's a lot of money seeking advice. And very few people understand that not all "advisers" operate under the same standards.

The fiduciary standard

Registered investment advisers operate under a "fiduciary" standard, which in essence requires the adviser to put the client's interests ahead of his or her own, and to fully disclose any potential conflicts of interest. You would think that would be a basic rule for any investment advice.

But stockbrokers -- often called "registered representatives" or even "advisers" -- adhere to a far lower "suitability" standard. The only requirement is that the investment be suitable and appropriate for the client.

There's a wide gap between these standards. The true investment adviser must disclose any costs or commissions, and must chose the lowest cost investment for the client. Not so with brokers, who are often incented to sell products with higher and/or hidden fees, or products that send big producers on nice trips to warm places in mid-winter! That investment might be "suitable" but more costly.

I write this having started my career as a stockbroker, and having seen the inner workings of several brokerage firms. When a firm is selling an offering of new shares for a public company, that company is the client of the firm -- not the individual who buys the stock. The brokers act as agents, often receiving hefty commissions or bonuses built into the price of the shares. Similarly, some mutual funds and insurance companies offer additional incentives to selling brokers. And as long as the product is "suitable," the client never knows there could be a less expensive or otherwise more attractive alternative.

That doesn't mean all stockbrokers are making money at the expense of their clients. No law has ever been able to create a moral compass. And many brokers know that the real way to create wealth is by increasing client assets through profitable investments. But how is the unsophisticated investor able to judge that advice without some rules and regulations requiring disclosure?

Government action

At long last the government seems ready to act. Recently U.S. Securities and Exchange Commission Chairman Mary Jo White told a group of securities firms that "the SEC should act on a uniform fiduciary standard for broker-dealers and investment advisers where the standard is to act in the best interest of the investor." In fact, the Dodd Frank act mandated a "study" of the issue of fiduciary standards.

And in recent weeks the Department of Labor, which is responsible for ERISA -- the laws that govern pension and retirement plans -- announced that it will require retirement advisers to put their clients' best interest before their own profits.

But actions will speak louder than words. And the financial services industry knows that any changes will hit their bottom line profitability, so they are gearing up to fight significant changes.

Good advice is always worth paying for. But until a law requiring a fiduciary standard is required for all investment sales people, it is still the investor's responsibility to ask any potential "adviser" how he or she is compensated on both advice given and products purchased. The easiest way is to ask your adviser to sign this simple pledge, designed by the Committee for the Fiduciary Standard:

1. I will always place your best interests first.

2. I will act with prudence; that is, with the skill, care, diligence and good judgment of a professional.

3. I will provide full and fair disclosure of all important facts.

4. I will avoid conflicts of interests.

5. I will fully disclose and fairly manage, in your favor, any unavoidable conflicts of interests.

Renowned financial advisor Harold Evensky, known as the "father of financial planning" and a member of the Fiduciary Committee, says: "There's no reason why any financial advisor should be unwilling to sign that pledge."

And regulators should ensure that investors should have a legal recourse to make sure the advice they are getting is designed to improve their own finances, and not that of the salesperson. That's the Savage Truth.

(Terry Savage is a Registered Investment Advisor, blogger and the author of four best-selling books, including "The Savage Truth on Money." Terry responds to question on her blog at