New Fiduciary Law and Changing Advice Part One
By Gary Silverman, CFP®
As I had discussed a while back, the Department of Labor (DOL) was working on rules to require financial professionals to provide their services as Fiduciaries. Well, the rule has now come out, so let’s take a look at it.
First, what’s all the fuss about this “Fiduciary” thing? It has to do with what standard of advice you receive when you work with an advisor. Those, like myself, who provided advice with Registered Investment Advisor licenses worked under a Fiduciary standard. That means that I am required to provide you with the solutions I think are in your best interest. Prior to this ruling, other advisors (most brokerage representatives and insurance agents) were only required to provide stuff to you that was “suitable.” That means it couldn’t be bad for you, but it didn’t have to be what the advisor thought was the best.
Why in the world would an advisor recommend something to you that they didn’t think was the best? Simple: It may not have paid as good or qualified them to win a contest or might not have even been offered by their company.
Now, I’ve said this before and I’ll say it again. Just because a broker rep or an agent wasn’t required to give you their best idea, and just because they might get paid more for a mediocre one—that didn’t mean that’s what was happening. If you’re choking in a restaurant I’m not required to help you out, but I will because that’s the right thing to do. And non-Fiduciary advisors out there may not have to have provided you their best recommendations, but many, if not most, certainly did.
The difference now is that it’s the law. Sort of.
You see, the DOL isn’t the regulatory body that normally deals with investments. That’s the Securities and Exchange Commission (SEC). The SEC has been talking about a Fiduciary standard for years, but it’s a very slow process. But the DOL, being in the labor business, has some jurisdiction over retirement plans since most of those are provided by employers to their employees. So if the SEC wasn’t going to put a Fiduciary standard across all financial advice, the DOL was at least going to make sure it was the law for retirement plans. This, for reasons I don’t quite understand, includes IRAs.
But there are a lot of things involving your money that aren’t retirement plans. If you have a non-IRA brokerage or mutual fund account, for instance, the DOL has no jurisdiction and this doesn’t apply. Plus, just as you wouldn’t expect a Ford dealer to recommend a Chevy to you even if they thought it was a better fit, the DOL doesn’t require someone at Fidelity to recommend a fund at Vanguard. But if it involves a retirement account, they will have to let you know that they are shopping for you out of a limited number of investments.
Then there’s the political aspects of this. We’ll look more into this and how this whole thing affects you next week.
This article was published in the Wichita Falls Times Record News on June 19, 2016.