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Should Your Advisor Be a Fiduciary?

March 6, 2017 by Parkside Advisors

The Fiduciary Rule was developed by the Department of Labor (DOL) to apply the definition of an “Investment Advice Fiduciary” under ERISA law to all retirement accounts, with the goal of increasing protection for retirement-account owners. This new rule is scheduled to be phased in from April 10th of this year through January 1, 2018. The gist is to ensure that advisors can no longer earn commissions or other forms of conflicted-advice compensation from retirement accounts unless they commit to a fiduciary standard.

To understand why the DOL considers this rule necessary, consider that one of the most common scenarios for providing investment advice on retirement accounts involves rolling over or transferring retirement accounts, for instance, from an employer’s 401k plan to a rollover IRA or from one IRA at a particular institution to another managed by the recommending advisor. Since the advisor is recommending an action for which he will be paid in the future, the DOL believes (and we strongly agree) that the advisor has an obligation to make sure his recommendation is in the best interest of the client, to diligently document the basis of his recommendation, and to be transparent about the research.

We find it hard to understand why any consumer would object to the rule — yet easy to understand why advisors might. For some insight into this, let’s review the details of the DOL rule, which will require that an advisor explicitly and proactively do the following with respect to recommending a retirement account rollover or transfer:

Acknowledge fiduciary status with respect to investment advice to the retirement investor

Adhere to “Impartial Conduct Standards” which requires the fiduciary advisor to:

  • Give advice that is in the client’s best interest,
  • Charge no more than “reasonable compensation”; and
  • Make no misleading statements about investment transactions, compensation, and conflicts of interest.

Implement policies and procedures reasonably and prudently designed to prevent violations of the Impartial Conduct Standards

Refrain from giving or using incentives for advisers to act contrary to the client’s best interest

Fairly disclose the fees, compensation, and Material Conflicts of Interest associated with their recommendations

In response to the threat of the new rule, Merrill Lynch and Morgan Stanley are disclosing fees and revamping their policies and offerings. Still, advisors, brokers, and other interested parties take umbrage at what they see as excessive regulation. There is a hue and cry of how, in the end, it’s going to hurt consumers and limit choice. As reported by CNBC on Dec 13th, the brokerage industry is hoping Trump will take up the fight against the rule. "To this point, litigation has been the only hope to stop the DOL rule, but now there are additional avenues to [achieve that]," said David Bellaire, Executive Vice President and General Counsel for the Financial Services Institute. His organization is part of a coalition of business groups that has filed suit in a Texas court to stop the DOL rule.

All we at Parkside can say about these regulations is “Hallelujah!” Finally, all advisors will be required to act in their clients’ best interests. Inevitably, retirement-plan administrators and custodians will provide more transparency about fees and expenses. Consumers will get to see whether they or their employers are paying 401(k) plan expenses, whether they are paying more for their plan’s investment offerings than they would pay elsewhere, what they pay for, and what they receive with regard to financial planning and other services and plan features. I wouldn’t be surprised if a generally accepted disclosure document results, where a consumer can easily compare the costs and benefits of their current account to another advisor’s or institution’s offering.

Whether the rule is repealed, implemented as is, or extended to all investment advice, the issue has raised public awareness, and I hope that consumers will hold their advisors to this standard regardless of the outcome. In fact, though the DOL rule applies only to retirement accounts, I would like to see the SEC implement a similar standard for non-retirement accounts.

Finally, I’d like to clarify the use of the label fiduciary. While the concept of a fiduciary is clear — “a person to whom property or power is entrusted for the benefit of another” — the implementation of that duty differs according to the enforcement agencies. In the realm of investment advice and management, there are three sources of fiduciary responsibilities: the DOL, the SEC, and the CFP Board. I’ve discussed the DOL fiduciary rule here at length. The SEC’s fiduciary duty stems from the Investment Adviser’s Act of 1940 requirement that advisors not be fraudulent, deceptive, or manipulative to consumers, as interpreted in a subsequent Supreme Court ruling.

Interestingly, the broadest implementation of the fiduciary standard is the one applied by the CFP Board to all CFP® certificants who are providing financial planning: to act in a client’s best interest in all elements of providing advice. As a planning-centered wealth manager, we at Parkside certainly apply this standard in all of our work.

To learn more about Parkside Advisors’s commitment to upholding fiduciary standards, please connect with us. For more personal finance insights, continue to follow our blog and follow us on Twitter and LinkedIn.

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Filed Under: Investment Management, Retirement

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