On March 15, 2018, the Court of Appeals vacated the Department of Labor Fiduciary Rule. While this may not sound particularly meaningful to the average person, it is. If you’ve got money in a retirement plan, it could likely impact you.
In 2016, a rule was passed requiring financial advisors who provide certain services to retirement savers to act as fiduciaries. If you are a fiduciary, you’re legally responsible to put the client’s interest before yours at all times. You’d think that would be a given, but it’s not. For some types of financial advisors, it’s perfectly legal for them to put their interests before yours. With this recent blow to the new rule, consumers need to make sure they are fully informed about who is helping them with their investments.
Understanding the Fiduciary Role
Fiduciary is not a term most of us hear every day, so more explanation is in order. It’s easiest to illustrate the fiduciary role with an analogy.
Let’s say you are concerned about your blood pressure, so you want to see a doctor. Would you rather see a doctor who is independent or one that works for Acme Drug Company? The independent doctor would probably give you some lifestyle recommendations, like cutting cut back on the martinis and fried foods and taking up yoga, before trying anything else. But what would the drug-company employed doctor most likely prescribe? Of course, a prescription of the company’s drug. Why should you expect anything different?
Because that person works for a company that sells a product, they are more of a salesperson than a doctor. And they get paid by selling you their products. Fortunately, with doctors, you don’t have to worry about that because all doctors have a fiduciary requirement to put your interests ahead of theirs. Not so with financial advisors.
Not All Advisors Are Fiduciaries
Although hundreds of thousands of people in the industry use the title "financial advisor," not all are true advisors. Some, namely registered investment advisors (RIAs) and investment advisor representatives, are held to the fiduciary standard. Others, including broker-dealers and registered representatives, are simply salespeople. And because they are salespeople and not advisors, they are not legally required to put your interests first. Instead, they are required to simply recommend something “suitable” to you. Even if it costs you more and pays them a higher commission.
Every day, unsuspecting investors put their trust in these non-fiduciary "advisors" who don’t legally have to put their clients' interests first. And instead of true advice, they get product recommendations that may or may not be good advice. The Department of Labor fiduciary rule was on course to change that, at least in regard to retirement accounts. But with the recent ruling, you can’t count on that law to help you in your dealings with advisors. (For related reading, see: Choosing a Financial Advisor: Suitability vs. Fiduciary Standards.)
Why It Matters
You may be wondering where you find these financial advisors who are really product salespeople. Usually they are employees of the large, name-brand firms that sell mutual funds, insurance and other financial products. While their advertising communicates concepts like care and trust, their business model is set up to serve their shareholders, not their clients. Why is this so important? There are many reasons.
In fact, here’s 17 billion: A White House Council of Economic Advisers (CEA) report states conflicted advice on investments is estimated to cost Americans $17 billion per year. These conflicts of interest are unfortunately all too common on Wall Street. Even though someone’s business card may say "advisor," if they are not a fiduciary, they don’t have to give you advice that puts your interests first.
While you may still may end up with a solution that fits, part of your money goes to pay commissions. Over time, even tiny percentages can compound into large numbers. Unfortunately, paying high commissions and fees can mean the difference between a great retirement and one filled with financial stress. So ideally, you want to avoid it altogether.
Registered Investment Advisory Firms
Conflicted advice is perfectly legal if you are an advisor who is subject to suitability regulations. These are the product salespeople who are paid on commission. But there’s another type of advisor, and this one is subject to very different regulations. This advisor is held to a much higher ethical standard. Legally, they must put your interests first at all times. These firms are registered investment advisory firms and their advisors are investment advisor representatives. (For related reading, see: What Is a Registered Investment Advisor?)
Usually these are the local, independent firms. You probably don’t know their names since they don’t have expensive advertising budgets. But since they are independent, they work for you, not for their corporate parent and shareholders.
Finding out who is a fiduciary and who is not can be difficult, since there are many creative titles and names out there. Even worse, some fiduciaries may be “dual registered” so they potentially can also act as salespersons part of the time. If you’re working with an advisor and they are a fiduciary, it’s likely they list that prominently on their website. If not, there’s another easy solution: Simply ask your advisor if they will sign a fiduciary oath promising to put your interests ahead of theirs in all circumstances. The beauty of the oath is if the person won’t sign it, you know you’re likely dealing with a product salesperson.
Make an Educated Decision Based on Your Needs
Obviously there are both types of advisors out there. While the fiduciary standard usually provides most benefits to investors who are looking for a full-service solution, there are times when the suitability standard might be a better choice. Maybe you know what you want and you’ve determined it’s cheaper to just pay a commission than fees. But the vital ingredient here is education and choice—you need to know what you’re buying so you can make an informed decision. And it’s particularly important to know if the "advice" you’re getting is real advice or simply a sales pitch. Don’t make an expensive mistake that may have you contributing to that $17 billion per year. Instead, get educated so you know exactly who you are dealing with.
(For more from this author, see: Evaluating Advisors' Performance With GIPS.)