Should I have a discussion with my advisor regarding the new fiduciary rule?
Should I ask my advisor if the new fiduciary rule will impact our business relationship? I understand the general guidelines of the rule being put in place in April, but I think it would be an important conversation to have to see if anything may change. How do you recommend I bring this up?
More important than the rule is his/her relationship with you and the environment they are in. Even the best advisor may do things not in your best interest if it means their job -- I have worked in those environments.
I belong to an organization called the National Association of Personal Financial Advisors, or NAPFA. They have been fiduciary advocates for decades. Here is a guide that they produced:
The core of all the drama is creating an environment that puts the client's interest first. And to be frank, this rule does not even come close to doing this, but many would say it is better than nothing. To be even more candid, many firms are changing models to be fiduciary in name only. Many advisors are "dual registered," which means they can put on their commission hats when it suits their purpose and then put on the fiduciary hats to look good other times.
And while commissions are the biggest conflict of interest, they are not the only one. Even a firm like Betterment will not say; give us less money and put more in the Roth with the other firm, or into your 401(k). Firms like Fidelity are going to recommend their funds, not what may be best for you. Firms like Edward Jones, Morgan, and Merrill will sell securities from their inventory or work with mutual funds that have revenue sharing. Choosing what produces the most revenue for them, not what may be best for you.
So the bottom line is, find out if your advisor is acting as a legal fiduciary and/or a real fiduciary -- are they in a position where they can choose what is best for you? Disclosing all fees; all conflicts of interest, like revenue sharing, like selling their funds or securities. Make sure they are transparent about what/who is influencing their decisions.
I would use the recent rule as a conversation starter; it is a way to bring it up without being offensive. You could say you have seen others firms talking about it. And to be honest, your advisor should want to talk about it. If they don't, what are they hiding? It's your money, your future, make sure they are acting in your best interest.
Mark Struthers CFA, CFP®
You absolutely can and should. In reality, if they were doing the right thing for you up to this point, there should not be any changes. We have seen advisors recommend clients move into unnecessary and higher cost services, and we've had some questions here that suggest that it is happening elsewhere as well.
I wrote an article for Investopedia here, but the truth of the matter is that advisors don't know. Many thought they knew what the rule would entail, but if you read it and the basis for it, there is a lot that advisors and the industry simply ignored.
Just like we don't know what will happen to the car market due to innovation and government imposition of costs on auto companies, we don't know what will happen with the market for financial advice. We can use economic reasoning to guess though:
- When government imposes costs on the true fiduciaries, and offers exemptions to bad actors, they incentivize bad actions.
- When technology offers consumers choice, true fiduciaries will have fewer clients who choose their services, especially in an environment when a rule like the fiduciary rule imposes cost and legal threats against true fiduciaries.
- When these things converge as quickly as they have, smart firms will reassess their ability to compete. We have seen large and small firms sell, fold, or change their business models.
- Future business models will change. You will have massive low-cost firms, and massive high-cost firms. We see this in all other industries where regulatory cost removes competitors in the middle. These are often the most nimble, the most entrepreneurial, and the ones that serve segments of the market that the large low-cost and the large high-cost both ignore.
- Finally, those politicians and intellectuals who promoted this rule have some very odd ideas about what it means to be a fiduciary, that I don't think many are yet aware of. I estimate these will cost true fiduciaries who implement them a lot in unnecessary busy work, meanwhile, the client will see no benefit. Given these bad ideas are just the start, and provide no benchmarks that advisors can feel comfortable with knowing that they met them, they do nothing but put costs on and a cloud over those who perform them, as well as those who don't.
Overall, it is worth a conversation, but it isn't one I would expect your advisor can know. I've been open with my clients about this rule forcing me away from 'the middle' where I have a 'sweet spot' for clients who want a fiduciary, but I can't afford unnecessary and irrational expenses in an ever changing market. It could be I have to remove 'no minimum' services, or charge new clients more, but I truly hope that isn't the case.
By all means, you should have a conversation with your advisor about the evolving nature of your business relationship. 25 to 30 years ago, most of the people who gave financial advice were either licensed as stockbrokers or an insurance agents. They got paid by collecting a commission on the securities and products they sold to their clients. For the most part, their recommendations were held to a suitability standard meaning "Do no Harm." Conflicts of interest were relatively common. These practitioners are supervised by state insurance commissions and/or the Securities Exchange Commission (SEC). Back then, the trend toward independent advice separated from a bank or brokerage and focused financial planning had just begun.
Today, there are over 70,000 Certified Financial Planners (CFPs), some of whom also practice as stock brokers or insurance agents and receive both commissions and fees, others of whom structure their practice as "fee-only", meaning they receive a fee that is unrelated to the transactions that occur in a client's account. Many independent advisors are Registered Investment Advisors (RIAs). The numbers of independent advisors has grown to be as large a group as the stockbrokers employed by the big banks and brokerages. These practitioners are registered with authorities that hold them to a fiduciary standard, meaning their advice should be in the "best interest of clients" and free from undisclosed conflicts of interest. Surveys have shown that the public is pretty confused about the differences between the various kinds of financial advisors.
The thinking behind the idea of adopting a judiciary standard to replace the suitability standard for retirement accounts in particular (and thus administered by the Department of Labor) was that this form of savings is, in many people's lives, one of their most important stores of wealth (perhaps second only to the equity in their home). Receiving suitable advice that may be full of high, sometimes undisclosed, fees was assumed to be an inferior advice model to one where fees are transparent and the advisor's conflicts of interest are fully disclosed. A common fiduciary standard for all types of retirement plan advisors seemed like a wise improvement.
Today, the Trump administration announced that as part of a broader rollback of federal regulations, they were putting a hold on the implementation of the fiduciary standard rule. Many financial services firms, however, are far down the path of adopting the standard and to turn back now might seem like a strategy designed to offer clients something other than fair fees and full disclosure. So, again, ask your advisor if he or she is willing to act in a fiduciary capacity in your business relationship. It's a great way to determine how committed they are to the best interest of you as their client.
This is a conversation worth having. However, you should be aware that this fiduciary rule is on thin ice. The new administration will be taking a hard look at the rule and has indicated a desire to have it undone. Don’t be shy about bringing it up. It is a valid concern.
Whether the rule remains or is scrapped, it is my belief that financial professionals recommending or selling investments should be putting their clients’ interests ahead of their own. It is already the standard that Registered Investment Advisors (RIAs) are held to. For advisors, like me, who make it their business to provide independent fiduciary advice, it is clear that the investing public should be demanding this approach whether it is the law, or not.
I know your question isn't necessary related to 403(b) plans, but I go into a little more detail about whether your advisor is putting your interests first in the article 403(b) Plans And What Teachers Need To Know. The portion of the article more applicable to your situation is near the end. I hope you find it helpful.
Please note that this should not be considered investment advice and is only educational in nature.
Best of luck!
David N. Waldrop, CFP®
I believe it is an important conversation to have with every advisor you have. The Fiduciary rule that was put on hold this week and sent back to the Department of Labor (DOL), that wrote the rule, for their review. The main purpose of the rule is to have more transparency in costs and conflicts of interest while ensuring Advisors are putting clients interest ahead of the advisor's or their company. The rule is directed toward advisors that provide advise and/or products to people that have retirement accounts (401(k), 403(b), IRA's, etc.). Regardless of what happens to the rule, you as a client you should know and understand what your advisor, and the company they work for, makes from your relationship and how they make their money as well as confirming your strategy and interests are put ahead of the Advisors. Some of the concern about the rule is, does it accomplish its goals and provide greater protection for the consumer? As with any regulatory process, some parts of the final rule were watered down by several factors of which the pros and cons can be debated at considerable length.
The rule which has many good points will create change when implemented, but at what cost and ultimate impact is yet to be seen.
I would definitely bring up the topic with a direct question and ask its impact to you, your account, financial planning, and investment goals. Ask about what the agent/ broker/ advisor sees happening with the ruling and what course of actions they will enact and how their solution will act not only your best interest, but how they intend to put your interests before theirs and if their actions are really better for you.
By the way, a Certified Financial Planner (CFP), Certified Financial Analyst (CFA), and most other top designations abide by and work in a fiduciary capacity. They sign documents when they renew their respective designations certification, but if you are working with one, I would ask them the same hard direct questions.