By Pam Krueger
The Department of Labor’s Fiduciary rule started making headlines the day it was finalized in April 2016. It was the first time that many Americans learned that financial advisors can legally play by different rules, and that the brokers they trust with their life savings aren’t required by law to always put their clients’ financial well being ahead of their own sales commissions. In other words, brokerage firms do not accept fiduciary responsibility when they offer advice.
The Fiduciary Rule is designed to change that, and now is making headlines again. This time it’s because the Trump administration has delayed implementation of the Fiduciary Rule which would have gone into effect in April 2017. Much has been written about the administration’s intent is to kill the new ‘best interests’ rule altogether, or at least water it down as much as possible. Others, however, believe the current rule should be even stronger to favor consumers even more.
It’s only your retirement savings at stake
Simply put, the rule would require full transparency for all expenses, fees and conflicts of interest. It would go a long way to ensure that all financial advisors, brokers or insurance agents offering retirement investment advice would behave as fiduciaries, effectively replacing the lower bar provided by the suitability standard. That’s the lower standard brokerage firms rely on today.
The Department of Labor is the caretaker for retirement plans and the DOL has two mandates: to protect Americans’ retirement savings, at the same time to educate consumers about how advisors operate. Educated consumers can choose to get their retirement advice from either a salesman at a brokerage firm, or a financial advisor who adheres to the higher fiduciary standard.
With the fiduciary rule in limbo, most of the brokerage world and their clients are left wondering what happens next.
Here comes the good news
The simple fact is there are tens of thousands of independent financial advisors and wealth managers who’ve always practiced as fiduciary advisors. These are financial advisors who have taken fiduciary responsibility seriously for decades. These advisors and financial planners don’t need a rule telling them to do the right thing. This goes for all client money—retirement savings or not. For that matter all of their advice on any financial planning matter is delivered putting your best interests first. Registered Investment Advisors who practice as fiduciaries already exist in plain sight. The challenge has always been how do consumers find them?
Eyes wide open: The financial services industry is not your financial advocate
This may not come as a total surprise, but it does seem counter-intuitive that the financial services industry doesn’t make it easy for investors to see how little is required of financial advisors.
The FINRA suitability standard that the brokerage world has operated under for years says in part, “A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer's investment profile.”
If this isn’t vague I don’t know what vague is. Nowhere in this excerpt or anywhere in the rule does it state that the broker must act in their client’s best interest.
You have the power: Choose an advisor who accepts fiduciary responsibility
What exactly does it mean to you? The SEC provides this information for newly registered investment advisors:
“As an investment adviser, you are a “fiduciary” to your advisory clients. This means that you have a fundamental obligation to act in the best interests of your clients and to provide investment advice in your clients’ best interests. You owe your clients a duty of undivided loyalty and utmost good faith. You should not engage in any activity in conflict with the interest of any client, and you should take steps reasonably necessary to fulfill your obligations.”
There is no ambiguity here. Advisors registered with the SEC must put your interests first to stay in business. Most state registered advisors are also covered by the rules of the Investment Advisors Act of 1940.
What should you expect in working with a Fiduciary?
Every advisor and every firm is a bit different, but in general you should expect that an advisor who acts as a fiduciary to use a process in working with you. They will start out learning as much about you as they can. Not only how much of your net worth is invested in the stock market, but what it is that keeps you up at night, your time horizon and calculating how much you can safely withdraw from your retirement savings. In other words, walking you through a plan designed to make your savings and investments last the rest of your life.
Their planning and forecasting process is different, it’s not driven by sales commissions, because fee-only advisors can’t take kick-backs from investment products they recommend. This approach allows a qualified advisor to make specific investment and planning recommendations tailored to your unique situation that are in your best interest.
Just because an advisory is a fiduciary, doesn’t guarantee competency
No all fiduciary advisors are equally competent in general, nor in the areas that are important to your situation. Here are some questions to ask any perspective advisor:
Are you a fiduciary advisor—can I have it in writing? Simple request, big red flag if they balk at this.
Are you really fee-based? How much do you earn from commissions? It is important to understand how their fee structure works and to what extent they earn money from commissions. There are some instances where excellent advisors sell commissioned products to best serve the needs of their clients and this is fine. What isn’t fine is anything less than full compensation disclosure, how much and from where with regard to their relationship with you.
How much will your advice cost me? Anything less than FULL disclosure is unacceptable, if they hem and haw, the conversation should end with you leaving their office or hanging up the phone.
Who is the custodian for your clients' accounts? This is important for several reasons. Is it someone who is reputable? One of the ways Madoff perpetrated his fraud on clients was using his own custodian. Beyond that aspect, ask the advisor why they chose this particular custodian. What’s in it for their clients? Do they receive any compensation from the custodian? Will you have online access to your money?
May I see your background records? All financial advisors who are federally or state registered are required to provide you with their form ADV when entering into a relationship with you. While this is a dry, legalese type document, there is some good information about the advisor and how they and their firm do business. Read it.
Beyond this you can check on any advisor or firm registered with the SEC or their state on the SEC’s Investment Advisor Public Disclosure site.
If the advisor was ever registered with a broker-dealer firm you might also search the FINRA Broker Check data base for information from that aspect of the advisor’s career. And of course, if an advisor you may be considering is registered as a broker their information will be here as well.
The simple question you must ask yourself
You deserve to work with an advisor who is a true fiduciary. Knowing all of this, why would anyone choose to work with an advisor who isn’t willing or capable of accepting fiduciary responsibility for his financial advice and investment recommendations?