If you’ve watched the news lately, you’ve most likely heard about the Department of Labor's (DOL) fiduciary rule. Just in case you haven't, here's a quick refresher.
The fiduciary rule was established under President Obama's administration in an effort to increase consumer protections for investors. Only days into office, President Trump signed an executive order asking for a full review of the law. This created a month's long delay of the rule and a lot of speculation that it would be scrapped entirely. (For more, see: DOL Fiduciary Rule Explained as of June 9th, 2017.)
After its review, the DOL could not find the legal grounds to continue a delay, so the rule finally took effect on June 9th. However, this is only a partial implementation and the DOL will continue listening to public opinion between now and January 1, 2018, when the rule is set to take full effect.
What Is the Fiduciary Rule All About?
When financial advisors act as fiduciaries, they are simply acting in your best interest. They are, essentially, putting your well-being ahead of their own.
If you're like most people, you probably thought this was already the law. After all, we expect this behavior from our doctors and lawyers, so why not from our financial advisers? Unfortunately, that’s because the current industry norm is what’s called the suitability standard. This means that your financial advisor must simply recommend investments that are “suitable” for you.
Fiduciary vs. Suitability: An Example
You want to take your family on an African safari. You’re not entirely comfortable booking the trip yourself, so you hire a travel agent. You meet with the agent, give him all the details on what’d you like to experience during the trip, and provide him with the information that he needs to schedule it.
A week later, you eagerly return to see what the agent has lined up. He runs through the proposal, hitting the highpoints of what you can expect, and tells you how amazing the trip is going to be. You agree and complete the booking. That sounds reasonable, right? But how do you know if he told you everything?
What if the safari you just booked was the only one that also offered the travel agent a free trip as well? Maybe this recommended safari was also more expensive than comparable options. Maybe that safari paid a higher commission to the agent.
In a “suitable” situation, none of these questions would matter. You gave the agent some information about what you were looking for, and he did a good enough job selecting the trip. In a “fiduciary” situation, these questions absolutely matter. The travel agent has a legal obligation to book you the best trip available, with no regard for how it impacts him. (For more, see: Choosing A Financial Advisor: Suitability vs. Fiduciary Standards.)
What the Rule Gets Right
The new rule is definitely a step in the right direction and a win for retirement account investors. The benefits of increased transparency and lower cost investment options will be immediate and make a real impact.
There's no doubt that the public outcry over these excessive fees and lack of governance was heard loud and clear, and this was made evident by the current administration's inability to gut the rule.
What's Still Missing?
Despite the rule's upcoming enforcement, there is still a lot to be desired.
For example, the rule only applies to retirement accounts. So if you have a rollover IRA and a couple of brokerage accounts, only the IRA is required to be managed under a fiduciary relationship. There are even some types of retirement accounts that aren't covered. Any plans not covered under ERISA, such as 403(b)s for K-12 public educators, aren’t subject to the fiduciary requirement.
Perhaps the most confusing thing still remaining for investors to navigate is the lack of governance around the terms "financial planner" and "financial advisor." The rule does nothing to clearly define who can and can't use these terms.
What Can You Do?
The good news is that several “fiduciary rules” are already in place, and they aren't limited to only certain account types. For example, any Registered Investment Advisor is required to register with either the Securities and Exchange Commission (SEC) or their state securities regulator and must stick to a fiduciary standard in all situations.
There are also organizations such as NAPFA, the XY Planning Network and the Garrett Planning Network that require all members to sign a fiduciary oath. A Certfied Financial Planner must act as fiduciary whenever financial planning services are being provided.
If you want to work with a financial planner that is always acting in your best interest, the best first step is simply to ask if they are required to do so. Ask which fiduciary oaths they have signed. Ask what their conflicts of interest are. Ask how they get paid and how they would be compensated from you if you were a client.
A fiduciary standard isn't for everyone. If you want a transactional relationship with your broker where you buy investment products and no advice is given, there's nothing wrong with that. But if you hire a "financial planner" and trust them with your life savings, you should at least know if they are acting in your best interest or theirs. (For more, see: How the Fiduciary Rule Will Resonate for Investors.)
Plimsoll Financial Planning is a Registered Investment Adviser in the State of Alabama and a member of NAPFA and the XY Planning Network. I'm also a CERTIFIED FINANCIAL PLANNER™ and fully supportive of the fiduciary rule.
I've never worked with a travel agent, due to my wife's ability to plan every second of every trip that we take. I hope the example above didn't come across as defamatory of their industry.