Broker Check

An Update on the Fiduciary Rule

| February 06, 2017
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As you may have seen in the press on Friday, President Trump issued an executive order for the Department of Labor to review the Fiduciary Rule which was passed into law in 2016.  The review may potentially delay the implementation of the Fiduciary Rule which is set to go into effect on April 10th 2017.


The Fiduciary Rule is perhaps the biggest change to the financial industry since ERISA in 1974.  The Fiduciary Rule requires all financial advisors who provide advice on retirement accounts (IRA, Roth,IRA, 401k, 403b, etc.) to act in the best interests of their clients.  More specifically, the rule will hold all financial advisors to the fiduciary standard which is the highest standard of care when advising the client.


Let me assure you, that I have always held myself out as a fiduciary and regardless of whether the rule is delayed or even repealed, I intend to continue to abide by the fiduciary standard which means I strive to provide advice to you that I believe is in your very best interest.  It also means that if there is a conflict of interest or potential conflict of interest, that I must disclose that to you in writing.


Providing financial advice that is in the best interest of the client seems like a simple concept.  Don't all advisors already abide by this principle?  The answer is unfortunately no - at the current time, not all advisors abide by or are held to the simple standard of providing advice that is in the best interest of the client.  Instead, many advisors are held to a different standard called the suitability standard.  By definition, this means that their advice must be suitable.  Suitable does not necessarily mean best interest.


To illustrate this concept, I thought that I would provide a hypothetical example of how the fiduciary standard and the suitability standard  might differ.  In our hypothetical example, we have Ben who worked for a company for most of his career.  Ben's company offered a 401k plan for its employees and Ben participated in this plan throughout his career.  When Ben decided to retire, he was faced with an important decision of whether to leave his 401k account with the employer in the 401k plan or roll over to an IRA.  There are a number of important points that go into Ben's decision as to whether to leave the funds in his 401k plan or roll over to an IRA.  Points to be considered are: what investment options are available in the 401k vs. the IRA?  Does the 401k offer better or worse investment options?  What are the fees in the 401k compared to the IRA?  Is Ben able to get advice on how to invest the money in the 401k compared to the IRA or does he need advice?  When and how can Ben access the money?  Are there tax consequences to be considered?  How will this fit into Ben's other investments?  These are just some of the potential points that must be considered in this important decision.


Under our hypothetical example, Ben seeks the advice of an advisor held to the suitability standard. The advisor encourages Ben to roll over to an IRA in a managed account at his firm for which the advisor is paid a commission.  This hypothetical advisor states that Ben will receive ongoing portfolio management on his IRA assets which is both true and suitable.


But is this Ben's very best choice?  It is a suitable choice, yes.  But under the fiduciary standard, the decision to roll over must be in Ben's very best interest.  Perhaps there are lower costs available if Ben stays in the plan.  Perhaps there is an investment option available in the plan that is particularly attractive and not available outside of the plan.  Maybe ongoing management of the IRA is not helpful to Ben.  On the other hand, perhaps there are lower costs available in the IRA.  Maybe there are more attractive investment options in the IRA.  Maybe ongoing management of the account is extremely helpful to Ben if he doesn't have the time, inclination, or knowledge to manage the account himself.  


The point is that there is a potential conflict of interest in that an advisor on the suitability standard may not be able to earn a commission if Ben stays in the  401k plan and could contend that rolling over to an IRA is suitable.  But the fiduciary is held to a higher legal standard.  The decision must be what is in Ben's very best interest.  The fiduciary must weigh all options carefully and advise the client as to what is in their very best interest, even if it means not earning a fee on a rollover IRA.  Many fiduciaries, myself included, are able to provide advice to a 401k participant and charge a fee if appropriate even if they stay in the plan, thus eliminating a potential conflict of interest.


I want to make one last point and this is important.  The vast majority of financial professionals on the suitability standard are honest, dedicated, caring, hardworking, experienced, and capable professionals.  They are good people that are simply held to a different legal standard and it is with the legal standard that I take issue.


To summarize, I am completely in favor of the Fiduciary Rule and hope that the inquiry ordered by Trump's administration results in implementation of the Fiduciary Rule in the very near future.  Even if the Fiduciary Rule is delayed or repealed, I have every intention of continuing to comply with the fiduciary standard which means providing advice that is in your very best interest.  Any conflict of interest must be disclosed in writing.

All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Past performance is not an indication or guarantee of future results

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