This summer, it may become more difficult for investors to determine whether a financial advisor indeed has their best interests at heart.
Starting June 30, financial advisors who are affiliated with broker-dealers legally will be required to place clients' interests first when they give financial advice.
This rule, which was handed down by the Securities and Exchange Commission and is known as Regulation Best Interest, requires firms to disclose and mitigate conflicts of interest.
Here's the complexity for clients: Not all financial advisors are subject to it.
Even after it takes effect, different standards will apply to these professionals based on whether they collect commissions and which regulatory bodies oversee them – the SEC, the Financial Industry Regulatory Authority or even state insurance regulators.
"For the most part, consumers aren't inclined to go through a lot of paperwork; they don't necessarily want to know the ins and outs of the laws that apply to that advisor," said Duane Thompson, senior policy analyst at Fi360, a fiduciary education firm.
"So they will have to either ask questions or read the disclosures for brokers who aren't fiduciaries to get a handle of how they're paid and what the conflicts of interest are," he said.
To further complicate the situation, authorities continue issuing new rules that center around advice.
On June 1, the Department of Labor, which oversees retirement plans like 401(k)s, issued a new rule to the Office of Management and Budget for review.
The language of the new rule, slugged "Improving Investment Advice for Workers and Retirees Exemption," isn't public yet.
"We don't know the contents, but it's fair to expect the rule will be based on Regulation BI, which is explicitly not a fiduciary standard," said Micah Hauptman, financial services counsel at the Consumer Federation of America.
The debate over the duty financial professionals must adhere to is an old one.
When recommending stocks, mutual funds and other products, brokers must choose a product that is "suitable" for a client's objectvies, according to FINRA regulators.
These individuals can collect commissions for their recommendations.
While these payments aren't necessarily bad on their own – a commission on a mutual fund might make sense if the investor holds it for many years – they can become problematic if they drive inappropriate advice.
Meanwhile, registered investment advisors fall under the purview of the SEC and must act as fiduciaries to their clients.
This is the highest legal duty one party can owe another, and it means the advisor must put the investor's interest ahead of their own.
Rather than taking a commission, RIAs assess fees based on assets under management. Advisors acting as fiduciaries have also used other methods of compensation to better reflect their ongoing relationships with clients, including charging subscription fees or by the hour.
From the consumer's perspective, the terms "fiduciary" and "best interest" may seem synonymous. They aren't.
For instance, brokers and their firms can still earn commissions under a "best interest" standard.
That's the heart of a lawsuit XY Planning Network — a fee-only network of advisors — has filed against the SEC, seeking to overturn Reg BI.
"This new rule means that broker-dealers may maintain harmful conflicts of interests while being able to market themselves as trusted advisers acting in their client's best interests," XYPN alleged in its suit.
Ultimately, it will be up to the investor to determine whether they can trust their financial advisor, by asking better questions that go beyond just "Are you acting in my best interest?"
Fred Reish, partner at Faegre Drinker in Los Angeles, highlights two questions that should be at the top of your list:
Investors must understand that the compensation an advisor receives for a recommendation can cause a conflict of interest, he said. Further, higher investment expenses sap returns over time.
"A lot of people feel awkward asking that question; they feel it's not polite," Reish said. "But it's their money, and they need to know the answer."
Those recommendations go along with the due diligence investors ought to be doing before they hire a financial advisor.
Investors should also ask upfront and in writing, "Are you a fiduciary?"
"You have to ask, 'Are you legally required to act as a fiduciary in my best interest?'" said Thompson. "Ask that question, rather than just 'Are you acting in my best interest?'"