Understanding the Fiduciary Standard Rule
Written by: Kristy Welsh
Last Updated: August 18, 2017
If all goes according to plan, gone are the days when financial advisors can give retirement investment advice that benefits them more than you. In April 2016, the Department of Labor finalized a new rule giving you the investor top priority, which is set to go into effect next year.
What is the Fiduciary Standard?
By definition, a fiduciary is a trustee. The "fiduciary standard" to which investment advisors are held was established in the Investment Advisors Act of 1940. The essence of it is this: those acting as a fiduciary must always put the interests of their clients above their own.
Who is Currently Held to the Fiduciary Standard, and Who is Not?
Only those investment advisors registered with the Securities and Exchange Commission or individual states are required to follow a fiduciary standard with their clients.
No fiduciary standard is required of broker-dealers, financial advisors, financial consultants, or financial planners.
What is the Suitability Standard?
This is the next-best thing to the fiduciary standard (though a very distant second).
As the term implies, the suitability standard requires financial advisors to only give you advice that is suitable for your financial situation. Broker-dealers operate under the suitability standard, as do other representatives of financial and insurance companies.
What Would the New Rule Do Exactly?
The Department of Labor’s rule would require anyone giving advice on retirement investments to follow the fiduciary standard. For instance, they would be prohibited from allowing the potential for a commission to influence investment advice. And they would be required to disclose any conflicts of interest. You can read the fact sheet about the rule in its entirety here.
Would All Investment Advice be Covered Under the New Fiduciary Standard?
No. The new rule is specific to advice regarding retirement planning vehicles, including IRAs, 401(k)s, and Keogh plans. The Wall Street Journal reports that the rule would also require the fiduciary standard be met for advice given regarding Archer medical savings accounts, health savings accounts, and Coverdell education savings accounts.
What Does the Industry Think of the New Rule?
Many advisors who aren’t already fiduciaries don’t like it one bit. Because putting their clients’ best interests first means losing profits.
"It’s undeniable that high fees and excessive trading costs damage the long-term potential of a retirement account and work against investors," writes Fortune’s Joshua Brown.
"Unfortunately, the brokerage business is predicated on selling the higher cost solutions because that’s where the profit margins are. The incentives paid by fund companies to brokerage firm sales forces across the country are a cancer that must be rooted out."
"This built-in conflict between advisor and client is partially responsible for the nation’s looming retirement crisis. It also plays a role in the finance industry’s almost universally negative perception among Americans."
Is the Rule a Done Deal?
The Department of Labor’s final rule has been published in the Federal Register. And its fact sheet states, "The revised definition of fiduciary and the compliance with the new attendant requirements will not begin to be required until April 10, 2017."
Though the lobbying effort is strong in support of legislation that would block this new rule, Forbes reports that it is unlikely to succeed:
"The fiduciary rule is technically 'effective' 60 days after publication in the Federal Register (that was April 8, 2016). So Congress has a limited window under the Congressional Review Act to block the rule by taking up the resolution. But that’s not going to work to kill the rule because President Obama would have the final say whether to approve or veto the resolution, and he would absolutely veto."
How Do I Know if My Financial Advisor is a Fiduciary?
Ask. If they’re not, find one. Here’s what to look for in a financial advisor, and here’s a great resource for finding one through the National Association of Personal Financial Advisors.
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