In 2016 the Department of Labor enacted new rules and regulations that will affect financial advisors who work with retirement assets like IRAs. In case you were wondering, that’s pretty much the entire industry.
On April 10th those changes were to go into effect.
Well, that was the plan anyway. Less than a week before the new rules were set to become law, the DOL delayed implementation of the fiduciary rule by 60 days.
Delay or not, financial advisors who work with retirement assets and the clients they serve are entering a new era.
The proposed Fiduciary Rule requires all financial advisors and others who work with retirement assets to put their clients’ interest before their own. For most financial advisors, putting their clients’ best interest first is simply business as usual. For others the new regulations will mark a sea change in the way they work and do business with their clients.
A tale of two standards
The financial services industry has long had two standards when it came to those who sold financial products or who made their living providing financial advice to clients.
The suitability standard required that investment advisors (stock brokers, registered representatives, financial advisors, insurance agents, whatever you choose to call them) recommend investment products that were considered “suitable and appropriate” for their clients. This standard didn’t require the advisor to act in the best interest of their clients, only that they recommend suitable and appropriate investments to their clients.
For example, if your advisor worked for an insurance company or brokerage firm that produced its own proprietary mutual funds, the advisor was free to recommend the company’s product over others that might be available at a competing firm or investment company – and to receive a commission for doing so.
Since a financial advisor was often paid more to sell some investment products (like the company’s proprietary investment products) than others, the Department of Labor argued that commission-based advisors who operated under the suitability standard had a greater potential for conflict of interest.
The fiduciary standard applies to advisors who receive a fee for managing assets rather than a commission on the sale of investment products. Under the fiduciary standard advisors are required to operate in their clients’ best interest at all times and do not receive a commission for their investment recommendations.
Independent financial advisors, Registered Investment Advisors, and others who charge a fee for client assets they manage operate under this standard.
The fiduciary standard is considered the higher of the two. Starting June 9th, the Fiduciary Rule will become the law of the land. All advisors who work with retirement accounts will be held to this standard.
So far so good
For most of the investing public these are good and welcome changes. Clients deserve to work with financial professionals that are held to the highest standards possible. If your advisor charges a quarterly asset management fee or a flat or hourly rate to manage your investment accounts, congratulations, your advisor is already working under the fiduciary standard.
Changes resulting from the new rules will be minimal, if any.
If your advisor currently works under the suitability standard in a commission-based account, change is coming. Most financial advisors who worked under the suitability standard probably did the right thing for their clients, but the new regulations may affect the products they offer, the fees you pay or how you engage with your advisor.
Some financial services firms have already taken steps to eliminate all commission-based business in the future. Others may be forced to resign from smaller accounts, move clients to a fee-based model, or require clients to sign a Best Interest Contract Exemption in which they acknowledge that their advisor is being paid a commission or receiving other forms of compensation.
None of this is inherently bad. But it does mean things will be different. If you work with a financial advisor talk to them about how your accounts are managed, how these new regulations affect you, and what your best options are going forward.