The Department of Labor’s (DOL) release of its proposed “Fiduciary Rule” last year was a shot heard around the world of finance. The Department’s ruling would have legally required advisors to act as a fiduciary with respect to recommendations made within investors’ retirement accounts. The rule more clearly outlined what advisors must disclose to their clients. It was slated to go into effect on April 10th of this year but an executive order signed by President Trump calling for its review has the rule on shaky ground. This has lead some people to stand up and proclaim the fiduciary standard as dead.
What’s the problem with the DOL fiduciary rule?
It depends on who you ask. The rule was called into question by the current administration because it claimed that products and services offered for retirement savings accounts might be restrained. The executive order also suggested that the rule may adversely disrupt the retirement advice industry and potentially lead to an increase in litigation.
If you ask someone who wants to do things the way they’ve always been done with limited client protections, then this rule is problematic. If you ask a financial advisor committed to the fiduciary standard, you may get the answer that the rule does not protect investors enough.
Does the fiduciary standard limit my options?
Absolutely. If your advisor is acting as a fiduciary, there are some products that you will likely never be offered. Acting in your best interest at all times means tailoring their investment approach to your specific needs. There are bound to be some investments or strategies that just aren’t the best option for your portfolio or goals. Alternately, there are some products that are never in the best interest of the client due to the high commissions or kickbacks embedded in those products.
Think about this: you are at the point of retiring and you’re looking for a financial advisor to help you handle the details of your transition, specifically what to do with your 401(k). The first advisor you engage is fee-based, not necessarily operating as a fiduciary, and suggests you do a rollover into the fund du jour. What that advisor is not telling you is that their recommendation means they’ll get a kickback from setting you up with that product. When an advisor’s own financial interests compete with your financial management, it’s unclear whether their decisions can be said to have your authentic best interest in mind.
The second advisor you visit is committed to the fiduciary standard and works at a fee-only firm, which means that they do not work in a commission world. Before making any recommendation, that fiduciary advisor asks themselves what is in your best interest in the long term? They will not blindly recommend a rollover to just increase the assets they manage for you just to collect more fees. It goes beyond that. The advisor will consider whether a rollover will help you accomplish one of many financial objectives including reducing the cost of the underlying investments, providing more investment options and/or ease of financial planning/management. If none of those things would be accomplished with a rollover, they would advise you to keep those funds put for now. A fiduciary advisor would make this recommendation by nature of their profession, but a fiduciary law would define the circumstances and disclosures for advisors who don’t currently adhere to the fiduciary standard.
What if it disrupts the industry?
Shaking things up may not be such a bad thing. In an industry with a long history of smoke and mirrors, big promises, and limited transparency about fees, disrupting the industry could be a step in the right direction. Of course, that’s if you’re a client under the advisement of a financial professional. Advisors and brokers working out of the major retail brokerages may have a different view as this would limit their ability to sell products that pad their pockets at the expense of their clients.
In this case, industry disruption might mean that Grandpa and Grandma have more money to spend on visiting the grandkids because their advisor advised them to hold on to a rental property for income. An advisor not acting as a fiduciary may have suggested them to sell that property so they could re-invest the proceeds of the sale into one of their funds.
Is there a risk of increased litigation?
Yes, there is a risk of increased litigation but that’s because the rule would afford clients the ability to file claims against their advisor for doing something against the rules. If it’s easier for the client to file a claim against a financial professional for acting against the best interest of that client, is that a bad thing? No. We think it’s a good thing.
What does it mean for the future of the fiduciary standard if the rule is thrown out?
No matter what the fate of the DOL’s Fiduciary rule is, the awareness of less-than-savory practices that it has raised is invaluable. The word fiduciary has entered the lexicon of the investing public. Many people whose retirement funds are managed by large retail brokerages are now asking their fund managers or financial advisors about their fiduciary duty, or lack thereof. The discussions that it has sparked have left the public more informed and aware of their options. Ask your advisor about their fee structure and the income they make based on their financial recommendations. If they’re getting a kickback based on what they’re offering you, you might ask yourself if you’re getting the best outcomes for you and your family.
Tobias Financial Advisors, established in 1980, provides personalized wealth management services to a select group of clients. They are a boutique firm who keeps in close touch with their clients. We are on the registry for the Institute for the Fiduciary Standard. Benjamin A. Tobias, CFP®, CPA/PFS, CIMA®, AIF®, is the founder and president and Marianela Collado, CPA/PFS, CFP® is a Senior Financial Advisor and shareholder.