There’s a great debate going on right now triggered by the Dodd-Frank financial reform law that passed last year. The core issue is this:

“Should all people offering investment services be held to a fiduciary standard?”

A fiduciary standard essentially means that folks in the investment industry would be held to a higher degree of accountability and, therefore, be held liable for bad suggestions. And yes, those “accountability” and “liable” things are what has got the big Wall Street firms in such a tizzy.

Put another way, a fiduciary is someone who is legally obligated to put his investors’ interests above his own – or that of his firm, for that matter. And I think I can speak for other fiduciaries when I say that I’m proud to have built my firm around that principle. You may not realize it, but the vast, vast majority of people who give financial advice are legally obligated to put their employer’s interests above their investors. So, you know, you’ll be taken care of right after all the bonuses are paid out.

Many investors hear that same question above and ask, “Aren’t those people already fiduciaries?”

The answer is: No, not by a long shot.

Many men and women wearing the title of financial advisor are actually treated under the law as salespeople. Known as registered representatives, they operate under a 1934 law that says they have to sell you what is suitable for you at that time. But like a real estate agent or a car salesman, once the sale is done and the commission is collected, their legal obligation ends. So while they may present themselves as advisors who will stick with you over the years, they are under no legal obligation to do so – and have no legal liability if they do not, either.

Furthermore – standby for another mutual fund rant – one of the the unintended consequences of the way the laws have been interpreted to date means that if a registered representative sells you a mutual fund, he is then effectively incentivized to not call you again afterwards, so that not only will he collect the upfront commission, but will also collect an on-going 12(b)1 fee.

If you don’t talk, after all, there is no legal requirement to re-assess that investment’s suitability for you again.

Kinda perverse, no?

That said, even if the rules promulgated under the new Dodd-Frank law do make registered representatives fiduciaries, don’t expect a new level of service. I’d expect lots of registered representatives to simply turn their backs on accounts from those in the ‘middle market’ – those households earning under $100,000 annually. Otherwise, the potential costs far outweigh the benefits.

That’s not just my own opinion, though. A recent survey by the National Association of Insurance and Financial Advisors reported that if the new fiduciary standard increased legal and compliance costs by 15%, then 65% of broker-dealers would only accept affluent accounts. Yikes.

So, regardless of the actual outcome of the debate, it would appear the financial planning options in front of the vast majority of the great American middle class could soon be either to (1) continue to receive potentially conflicted advice or (2) no longer have access to anyone that might help otherwise them.

Rock, meet hard place.

Fortunately, there is third option – it’s just one most investors aren’t aware of yet. More on this soon.