Although many investors might assume the people they are paying for advice have their best interests at heart, U.S. regulators don t hold all investing professionals to such a fiduciary standard. The financial reform legislation could change that and give investors a new layer of protection down the road.

Today, advisors but not broker-dealers are bound by law to serve their clients. The Investment Company Act of 1940 lays out the rules governing the relationship between advisors and their clients, and the Supreme Court has said that it calls for a fiduciary relationship.

Broker-dealers, whose relationship with their clients is governed by the Securities Exchange Act of 1934, are not held to that standard because they received an exemption in the 1940 Act. If the advice they give is incidental to the sale they make, they are not held to a fiduciary standard. That is why some say firms like Goldman Sachs (GS) are legally within their rights to market investment vehicles they plan to short.

This didn t use to be a big deal, but over the last decade loyalties have been tested, as many wire houses and brokerage firms offered advice, says Harold Evensky, president of Evensky & Katz Wealth Management. Now, some legislators say investors have the right to expect that their relationship is a fiduciary one.

Congress attemped to sort this out in negotiations over the financial reform legislation. A measure approved by the House would require any professional who provides financial advice to maintain a fiduciary responsibility. At one point, the Senate s version of the new regulation included a provision that simply eliminated broker dealers exemption from the standard, but that provision was replaced by the suggestion of a study of the issue. Proponents of the fiduciary standard took issue with that move because although the new bill called for the study, it didn t give regulators the power to make changes based on its results. In the final version of the bill, lawmkers agreed on a compromise that would empower the Securities and Exchange Commission to act on the six-month study.

Whether securities firms as well as insurance companies should be held to a written best-interest standard and what the outcomes of such a mandate would be remain matters of debate. Here s what two policy watchers had to say.

Who s Talking: Harold Evensky, president, Evensky & Katz Wealth Management.

The Gist: The investor has a right to expect a fiduciary relationship.

Even though there are fundamental differences between the client relationships of advisors and those of broker-dealers, investors are typically unaware of them, says Evensky.

The problem is that it s possible for brokers to be truthful with their clients but still not act in their best interest, he says. For instance, if a broker sells a client a variable annuity and says that the insurance company, not the client, is paying the commission, that would be factual, but misleading. Another example would be telling a client there is no commission on a bond trade when there s a markup, he says. In a fiduciary relationship, the investing professional would have to disclose that information because it could serve the client s best interest.

The Committee for the Fiduciary Standard has called for a standard that includes five principles: put the client s interest first; act with prudence; don t mislead clients, and provide conspicuous, fair and full disclosure; avoid conflicts of interest; and when conflicts of interest can t be avoided, fully disclose them and act in the client s favor.

Evensky says that while investors wait for regulators to sort out the rules, they can take those five principles to an advisor and ask them to sign a paper saying they ll follow them. You don t have to wait for Congress to do something, he says. Whomever you are dealing with, get it upfront what the relationship is.

Who s Talking: Lisa Roth, chair of the member advocacy committee for the National Association of Independent Broker/Dealers

The Gist: Lawmakers should focus on making fiduciary standards for people who provide advice specifically to retail investors, not for every broker-dealer, says Roth.

The idea that even investment advisors, who are defined as fiduciaries, consistently are going to put their clients first is wishful thinking, says Roth. Moreover, lawmakers haven t adequately defined fiduciary.

A broker may have a division that offers retail investment services, and for that division the standard fits well. However, the firm may also have a proprietary book of business or deal with an institution in such a way that doesn t rise to a fiduciary standard, she says. In those situations, a fiduciary level of service wouldn t be logical or even meaningful, she says.

Roth says fiduciary responsibility should be placed on those who provide services for retail clients, not those who do proprietary trading or deal with institutions. Applying a broad mandate is complicated. A workable option would be to decide that a certain level of service dictates a fiduciary standard, she says.

Roth supports the decision for an SEC study. Previous studies have indicated that investors don t understand the difference between brokers and advisors, she says. I think the next study determines that certain levels of investors have certain expectations, and fiduciary duties are assigned in appropriate and meaningful cases along the lines of service instead of along the lines of registration, she adds.