The Department of Labor recently released its final draft of their fiduciary rules mandating that financial advisors place their client’s best interests first when offering advice on their retirement accounts. Here is a post I wrote just before the release. DOL Fiduciary Rules – What Do They Mean For You?
Much has been written of late, and more will be written (including on this site), about the issue of financial advisors as fiduciaries under the new DOL fiduciary rules. The phase-in of the new rules begins in April of 2017, with full implementation on January 1, 2018.
At the end of the day, however, why should you as an investor care if your financial advisor is a fiduciary?
Definition of a Fiduciary
fi•du•ci•ar•y – A financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a Fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest.
This is the definition of Fiduciary used by NAPFA (National Association of Personal Financial Advisors) the largest professional organization of fee-only financial advisors in the United States.
Why should you care if your financial advisor is a fiduciary?
Stock brokers are regulated by FINRA, who required them to make recommendations that are suitable for their clients. I’ve never come across a good definition of what suitable really means. Here is one definition I did find several years ago on the website of Clausen Miller a law firm with offices in major U.S. and international cities:
The suitability rule provides that when a financial representative recommends to an investor the purchase, sale or exchange of any security, a financial representative shall have reasonable grounds for believing that the recommendation is suitable for such investor upon the basis of the facts, if any, disclosed by such investor as to his or her other security holdings and as to his or her financial situation and needs.
This really doesn’t specify anything about loyalty to the client, disclosure or anything else. The word reasonable is quite vague at best.
This brings me to the reason that clients should care if their financial advisor is a fiduciary. As a client I would want to know that my financial advisor is acting with my best interests at heart, that he or she is making recommendations to me that are in my best interest. In fact, as you receive disclosures telling you that your broker, financial advisor or registered rep is now a fiduciary acting in your best interests a logical question is, “Weren’t you doing this in the past?”
Several years ago Charles Schwab ran an ad depicting a brokerage office pushing the stock of the day and used the phrase “…let’s put lipstick on this pig…” While humorous (and perhaps exaggerated) I fear that it did reflect the mentality of many product pushing sales people calling themselves financial advisors.
Many investors don’t understand
The worst part is that most of the investing public doesn’t really understand all of this. Many financial advisors who were previously subject to the suitability rules are competent and concerned with the welfare of their clients. They make recommendations that are in line with the best interests of their clients. Unfortunately, there are others who don’t and were not required to under the vagaries of the suitability rules.
While the final fiduciary rules were watered down a bit from prior draft versions, they none the less will change the landscape for financial advisors and their clients. Pay attention to any and all disclosures that you might receive from your financial advisor. Ask questions and don’t settle for half-baked answers.
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