Does the New Fiduciary Rule Matter to You?
Not all financial planners or advisors have to consider what is in your best interest when they make investment recommendations. A large number of them make recommendations that they think are appropriate, but they don’t have to have supporting documentation or research to show why this recommendation is in your best interest. In many cases, these advisors are trained sales people and are unaware of other options that may be a better fit for your financial circumstances.
However, a new law may begin to change this. A “fiduciary” is someone who legally and ethically must act in their client’s best interest. Attorneys, for example, have a fiduciary duty to their clients. A new law has proposed that financial advisors also be required to act in a fiduciary capacity – at least in some cases.
The New Law
The new law is the Department of Labor (DOL) Conflict of Interest Rule,]1 commonly called the Fiduciary Rule. Portions of the Fiduciary Rule were supposed to go into effect on April 10, 2017, but the implementation date was extended to June 9, 2017, to give more time for potential revisions. Right now, the rule is scheduled to go into effect on June 9, but with the current regulatory environment, no one is certain if the rule will remain in place.
Unfortunately, even if this rule goes through in its entirety, it will not put a legal fiduciary duty in place for all financial transactions. Most of the public does not know this. Here’s the problem with the fiduciary rule.
The new fiduciary rule only applies to retirement accounts. That’s nuts.
Let’s look at a scenario, a client whom I’ll call Linda. Linda’s mom is in her 90s, and Linda has recently begun handling her mom’s financial matters. Mom has accounts at several brokerage firms. Linda mentioned she was glad this new rule was coming so these advisors would have to apply a fiduciary duty to the management of mom’s accounts. I explained to Linda that the new rule only applies to retirement accounts, such as a 401(k) or an IRA. Not a single one of Linda’s mom’s accounts are retirement accounts.
Linda exclaimed, “What? These brokers won’t have a fiduciary duty to act in mom’s best interests. Why?”
What a great question. Here’s how it works.
The DOL does not regulate financial services activity unless it is a retirement plan through your employer. The DOL Fiduciary Rule is designed to regulate activities related to employer-sponsored plans and anyone who gives advice on retirement plans, including advice on rolling over or transferring a retirement plan to an IRA. The DOL Fiduciary Rule does not and will not apply to accounts that are not retirement accounts.
There are several other agencies that already govern the delivery of financial services, including advice related to both retirement and non-retirement accounts. One is the Financial Industry Regulatory Authority (FINRA), which regulates anyone who carries a securities license and thus can collect a commission. Another regulatory agency is the Securities and Exchange Commission(SEC) which oversees individuals and firms that are registered investment advisors (RIAs) who manage over $100 million of assets. Each state also has a securities commission which oversees advisors who manage less than $100 million of assets. Then you have each state’s insurance department which oversees insurance agents who may also be making financial recommendations, such as advising on the purchase of a fixed annuity or life insurance product.
Certain types of advisors and firms called registered investment advisors, who are registered with the SEC, or with their state securities commission, are required to adhere to the Investment Advisor Act of 1940, which requires a fiduciary standard of care. There is already a fiduciary standard in place for financial advisors who choose to practice that way. That means even without the DOL Fiduciary Rule a fee-only registered investment advisor is required to put their client’s interest first, whether funds are in a retirement account or not. This is the type of advisor you want.
However, under current law, financial advisors can be dually registered, carrying both a securities licenses with FINRA and registering as an investment advisor with the SEC. When acting as an investment advisor, such as advising you on a fee-based account, they have a fiduciary duty, but they can also make recommendations about other types of products, and their fiduciary duty does not extend to the advice they offer on these products!
The problem is the Investment Advisor Act of 1940 does not apply to everyone who gives investment or financial planning advice. Under current law, it applies to a minority of people who are registered investment advisors. So, we already have a fiduciary rule that applies only to some advisors. And now we have a potential new rule, which applies only to certain transactions. To illustrate the confusion, here’s a recent conversation I had.
A prospective client asked me, “Are you a… one of those ‘F’ words I keep hearing in the news?”
“Fiduciary?” I asked.
“Yes, that’s it, fiduciary,” he said. “I couldn’t remember the word, but it means you put your client’s interest first, right?”
“Yes,” I replied. “All planners at my firm have a fiduciary duty to our clients, and it means we must put our client’s interests first.”
“Will you still be a fiduciary if this rule in the news doesn’t go through?”
“Yes,” I explained, “Because we are registered investment advisors, we have a legal obligation to put our client’s interests first, regardless of the status of the DOL rule.”
What the industry needs is one standard of care, not another agency, invoking another rule that applies only to some transactions.
So, What Should a Consumer Looking for Financial Advice Do?
I think anyone who gives financial advice to a consumer should be required to have a fiduciary duty to their client. But until there is one easy-to-understand standard of care, all consumers should know they can obtain fiduciary advice by seeking out credentialed advisors who already practice as a fiduciary, and who will continue to do so, regardless of the status of the DOL rule. One way to find such a person is through NAPFA, an organization of fee-only financial advisors. Our planners are members of NAPFA.
Of course, there are great advisors who aren’t members of NAPFA. That doesn’t mean they give bad advice. The problem is anyone can call themselves a financial advisor, and it is not clear whether that person is, as a matter of law, required to act in their client’s best interests. One way to screen out someone who could potentially put their own sales interest ahead of what is best for you is to make sure the person you are working with is a fee-only registered investment advisor who has a fiduciary duty to you.
Bottom line: your best option is to work with an advisor who already has, as a matter of law, a fiduciary duty to you. Sensible Money has a fiduciary duty to their clients. If you’d like to free up time and energy to focus on areas outside of money, hiring and advisor is a smart idea, and hiring one that is a fiduciary is even smarter.
Written by Dana Anspach, author of Control Your Retirement Destiny and Social Security Sense. A version of this article was originally published in the Huffington Post.