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.

More from Advisor Insight:
Consumers need to know what being a ‘fiduciary’ advisor means
Your advisor skipping the federal disclosure rule might not be bad
How to vet your own financial advisor

“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.

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.

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.

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.

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.

The SEC’s “Regulation Best Interest,” with which brokerage firms had to begin complying in June, was the agency’s way of addressing the issue.

It followed an Obama-era rule that sought to tamp down on brokerage conflicts in accounts like 401(k) plans and individual retirement accounts, but which was overturned in court.

“We have established and are now holding broker-dealers to a significantly higher standard of conduct,” according to an SEC spokeswoman. “All registered financial professionals are required to make recommendations in the best interest of their retail customers and are prohibited by law from putting their interests ahead of their customers’ interests.”

However, consumer advocates believe the rule codified the prior “suitability” standard using more disclosure and a few tweaks around the edges that don’t do much to protect the investing public.

Use of the term “best interest” is a dangerous precedent, advocates said. Consumers may falsely believe the advice they get is akin to the fiduciary standard among financial advisors, they said. SEC officials have acknowledged the rule doesn’t rise to that fiduciary level.

“The murkiness of the rule allows firms to exploit the loopholes or the murky areas to continue abusive practices,” said Andrea Seidt, commissioner of the Ohio Division of Securities, which regulates brokers and financial advisors in the state.

For example, SEC officials have acknowledged brokers still don’t have the responsibility to recommend the lowest-cost investment options, which sends a “mixed signal,” said Seidt, who heads up a NASAA committee on implementing the SEC rule.

The rule also didn’t outlaw sales contests at brokerage firms, which generally entice brokers to sell high-commission products like variable annuities, private placements and non-traded real estate investment trusts.

“That kind of [investment] sold to the wrong person could be disastrous,” especially in the current economic crisis when investors may need to tap their money for emergencies and find it’s stuck in an illiquid investment, said Seidt.

The SEC rule did disallow brokers from using the term “financial advisor” in marketing. But dually registered individuals and firms can still use the term. And brokers can still use misleading terms like financial consultant, chartered wealth advisor, retirement consultant, wealth manager and retirement counselor, advocates said.

The SEC rule is still new. It remains to be seen how much of a positive or negative impact it will have on the advice consumers receive.

Brokerage firms have been making “significant changes” to implement the SEC’s new rule, according to Kevin Carroll, associate general counsel at the Securities Industry and Financial Markets Association, a trade group representing some of the industry’s largest brokerages.

“We’re only four months past the compliance date of Reg BI, and things seem to be going well,” he said.

Many have stopped selling certain high-cost, low-rated investments and have shifted to a commission model that doesn’t make one firm’s investment more enticing to a broker over another, for example, he said.

Consumers who want to know more about the conflicts (like fees) in a brokerage or advisory firm’s business can read disclosures in a client relationship summary (Form CRS) that firms are required to provide to new clients, Carroll said.

Brokers generally remain a lower-cost option relative to advisors for consumers who trade stocks and mutual funds infrequently and hold them for a long time.

Consumers who want ongoing, holistic advice and to reduce exposure to conflicts of interest as much as possible should seek out a “fee-only” financial advisor, according to consumer advocates.

They can search for such advisors in networks like the National Association of Personal Financial Advisors, Garrett Planning Network, XY Planning Network and Alliance of Comprehensive Planners.

Such advisors must have a baseline competency like the CFP designation for financial planners and only receive flat fees for their hourly service, monthly subscriptions or fees based on the assets they manage for clients, according to Rhoades.

“This is the easiest way for a consumer to find somebody who is definitely on their side,” he said.

Consumers should interview at least three different advisors after conducting a search to ensure the right fit, he said.

As a firewall, they can ask the advisor to sign a code of ethics developed by the Institute for the Fiduciary Standard. Consumers should be wary of advisors who refuse to sign, Rostad said.

Consumers can consult the SEC’s Investment Adviser Public Disclosure database for specific information, such as disciplinary records, about an advisor and the advisor’s firm.

Finra’s BrokerCheck offers similar information about brokers and their firms.