The Evolving Role of a Fiduciary
by: Smith and Howard Wealth Management
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 and 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.
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 and 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.
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