The Evolving Role of a Fiduciary

In April, the Department of Labor issued a ruling that has significant implications for investors at all levels.  Although the ruling is facing efforts by the U.S. Chamber of Commerce and members of the House Financial Services Committee to block or change it before its official implementation in April 2017, chances are good that it will survive in some fashion and investors should understand what it may mean to them.

Fiduciary Rule: The Basics

The goal for the Department of Labor has been to mitigate conflicts of interest between a retirement investor and an advisor. The rule, most widely referred to as the “fiduciary rule” was designed to hold stockbrokers providing retirement advice to a fiduciary level of service, which means that they serve their clients’ best interests. This substantially elevates the standard for this area of the industry over their current obligation to offer “suitable” recommendation. Under the suitable recommendation rules, advisors can recommend an investment that has higher (and sometimes excessive) fees that may not be the best option for the client. In some cases, the recommendations made for investments could produce hidden fees that generated more revenue for the advisor and decreased the savings of the investor over time. Although there isn’t anything inherently wrong with charging commissions, the fact that commissions can increase the earnings of the advisor without providing clear-cut transparency or protection for the investor creates the conditions and opportunity for some advisors to suggest investments not in the client’s best interests.

What the Rule Really Does (or Doesn’t Do)

Smith & Howard Wealth Management, as an SEC Registered Investment Advisor (“RIA”), has been acting in a fiduciary capacity since our founding in 1999. We take it a step further by operating under a fee-only model. The fee-only model is generally regarded as the model that best mitigates conflicts of interest between an advisor and an investor. While we applaud any sincere effort to provide true fiduciary level services to individual investors, there are some areas of the rule that call for elaboration and perhaps some caution.

  1. Some news articles imply that the new fiduciary ruling has taken effect and is “now the law” (quote from Labor Secretary Thomas Perez). This is not correct and investors should not assume that their stockbroker/advisor is immediately in compliance or required to be. The ruling provides for an eight month implementation period (to April 2017) on several provisions and requires firms to be fully compliant by January 1, 2018.
  2. The ruling still allows advisors flexibility to promote their firm’s own products (including mutual funds), leaving the door to self-interest on the advisor’s part cracked open a bit. As an independent fee-only RIA, SHWM is not bound to one company’s investments. We will continue to recommend what we believe is truly in the best interest of our clients. As has always been the case, our portfolio recommendations will carry no obligation to a particular company’s investments.
  3. If an advisor wants to receive commissions and compensation for selling products, they can, but must provide a “best interest contract” pledging to put their client’s best interests first. The client must read and sign the contract. One implication of this rule would be that the advisor from one large firm would not be obligated to advise a client about another (perhaps more appropriate) product offered by a competitor as long as they have a reasonable basis to believe that their firm’s products are in the best interest of the client. So in a case such as this, the advisor would make the decision on how many options the client has to choose from.
  4. The best interest contract gets signed only one time. Subsequent calls from different representatives of a large brokerage firm, for instance, would not require similar best interest contracts.
  5. The best interest contract applies only to new clients of advisors affected by the rule. Existing clients of an advisor covered under the fiduciary rule would simply receive a notice telling them about the advisor’s obligations under the rule.
  6. The fiduciary rule only applies to retirement accounts such as an IRA. Other accounts such as a brokerage account (taxable account) will not require a fiduciary engagement and will continue in the manner they are currently being serviced. Consumers should be aware when their investments require a fiduciary.
  7. In the world of SEC RIAs, any advice we provide to clients – even in the form of newsletters, commentary and marketing material – must meet a stringent fiduciary level. The new rule for non-SEC RIAs allows other advisors to continue offering a wide range of guidance outside of the fiduciary rules for “advice.”
  8. Included in the rule are fixed-indexed annuities; these will now require a “best interest” contract before sale, which will affect insurers in addition to brokers.

There is some speculation that middle-class investors will bear the brunt of this rule, as it has the potential to make serving the retirement plan needs of middle-class Americans at a higher level of service too costly for financial advisors who have relied heavily on commissions and products. Additionally, the potential for liability due to the fiduciary standard may be too risky for some advisors to carry smaller accounts. Anticipating this, Washington has set up a “no frills savings program” called MyRA, which is a government-run savings plan specifically for middle-class investors. As with any investment, we recommend investors study investment offerings closely and consult with an objective advisor whenever possible prior to making investment decisions.

What We Believe

As professionals having voluntarily chosen a stringent fiduciary role since our founding, we are proponents of strengthening the level of trustworthy advice and security of an individual’s retirement savings. We understand and believe in the value of planning and saving in a manner that is best for the individual and their family. While this rule takes some steps in that direction, it does not accomplish the desired standard of complete trust that is offered from a fee-only Registered Investment Advisor. We believe that this standard is the only one that effectively mitigates conflicts of interest.

Transparency of fees and competency are critical in a relationship with your investment advisor. Neither of those matters was addressed in this new fiduciary ruling. SHWM ensures both with our clients: fees are presented in a clear, concise manner and our professionals carry the industry’s most trusted credentials: CFA, CFP® and CPA.

What You Should Do

If you are with a broker or advisor that is not fee-only, take some time to read about and understand what the new rule will and will not provide you. Exercise caution in working with advisors who sell products and do your own research prior to making investment decisions in that regard.

If you are with a fee-only RIA such as Smith & Howard Wealth Management, little has changed. We have – and will continue to – adhere to the highest possible standard of fiduciary duty to each of our clients. We do not sell products and we do not receive commissions.

If you have questions about your current investments or retirement plan fund and would like to talk to us about how the new rule may affect you, please contact me or anyone at SHWM at 404-874-6244.