This article originally appeared on CNBC by Greg Iacurci.

Key Points:

• A new SEC rule is meant to reduce conflicts of interest among brokers who sell investments like mutual funds and annuities to clients.
• But the rule still allows brokers, often indistinguishable from financial advisors in clients’ eyes, to engage in sales behavior that puts investors at financial risk, according to consumer advocates.
• The SEC rule, called Regulation Best Interest, may have made the prior situation worse, those advocates say.

These days, it’s harder than ever for consumers to know if they’re getting good financial advice.

Current rules make it easy — and legal — for brokers to recommend investments that aren’t in the best interest of their clients.

This framework has been in place for years on Wall Street. But financial regulators have further muddied the waters in recent months, according to consumer advocates and other financial experts.

Perhaps most significantly, a rule adopted by the Securities and Exchange Commission may give investors a false sense of security, they said.

“It is a wolf in sheep’s clothing,” said Ron Rhoades, certified financial planner and director of the personal financial planning program at Western Kentucky University, of the rule.

“It creates the illusion someone is acting in a consumer’s best interest, when in fact there’s no requirement to do that,” Rhoades added.

Broker vs. advisor

The central challenge when shopping for financial advice is a long-standing dichotomy between brokers and financial advisors and how they’re allowed to work with clients.

Brokers sell investments and earn commissions, which can vary depending on the type of investment and company offering it. Financial advisors generally charge an annual fee for ongoing financial advice, and that fee doesn’t change regardless of the investment they recommend.

In 2019, there were nearly 625,000 brokers (or, registered representatives), according to the Financial Industry Regulatory Authority, a brokerage watchdog. There are about 360,000 financial advisors (known as investment adviser representatives), according to the North American Securities Administrators Association.

Suitability vs. fiduciary

Advisors give advice to clients as fiduciaries — the same legal standard of care owed by lawyers and doctors, for example. They must place a client’s interests ahead of their own.

Until recently, brokers had a less-stringent standard of care known as “suitability.” They gave suitable, but not necessarily the best, advice based on a client’s age, goals and other metrics. (As an example, if an annuity were deemed appropriate for a client, brokers could generally sell a higher-cost option like a variable or indexed annuity instead of a lower-cost annuity perhaps better-suited to the client.)

For years, brokers were legally able to call themselves “financial advisors,” confusing the distinction for consumers.

More confusing still, many brokers are “dually registered.” That means they can serve both as fiduciary advisors in some circumstances and brokers in others — all with the same client, who may not know when that switch occurs. Roughly 300,000 financial advisors (83% of the total) are dually registered, according to NASAA.

This is all to say that it’s a challenging environment for consumers.

Costly

Conflicts of interest among brokers — such as commissions and sales contests — could prove costly. They cost retirement investors about $17 billion a year (about 1 percentage point in returns), according to an Obama-era White House Council of Economic Advisors report.

Firms are required disclose such conflicts, but those notices are generally buried in pages of legal print.

… The broker exists to distribute product, while the advisor exists legally to render advice in the best interests of a client.

Knut Rostad, President of the Institute for the Fiduciary Standard

Of course, not all or even most brokers and brokerage firms necessarily engage in bad and deceptive behavior. Some firms put guardrails in place to reduce conflict and prevent clients from being victimized by bad actors.

And not all financial advisors are necessarily angels, either, said Knut Rostad, president of the Institute for the Fiduciary Standard.

“But you don’t have to dig very far to say the broker exists to distribute product, while the advisor exists legally to render advice in the best interests of a client,” he said.

Read the full article on CNBC.com.