The Department of Labor (DOL) recently issued new regulations enacting a fiduciary rule for retirement plan advice, in an effort to end some of the abuses that unfortunately are widespread in retirement plans. We covered the background and main terms of the rule after it was released on April 6 (you can read our take here). Due to this new regulation, the term “fiduciary” has received a lot of attention in the news and on financial talk shows lately. Just last weekend, Last Week Tonight with John Oliver dedicated an entire segment to the fiduciary standard, proving that the term has officially made its way into the mainstream.
Here is the big-picture story behind the DOL’s regulation (and the reason this has received so much attention suddenly): for years, there has been a battle brewing in the financial services industry over the fiduciary standard. The DOL’s fiduciary rule is just the latest clash in a much larger financial-services civil war.
What Is a Fiduciary, Anyway?
Let’s back up: there are significant differences in how traditional Wall Street brokerage firms and registered investment advisors (RIAs) are regulated under current law. RIAs, like our firm, are regulated by the Investment Advisers Act of 1940; the terms of this act impose a fiduciary duty on all RIAs, but not most brokerage firms. By definition, fiduciary advisors have “an affirmative duty of utmost good faith to act solely in the best interests of their clients, and to make full and fair disclosure of all material facts,” particularly with respect to actual or potential conflicts of interest. Above all, a fiduciary advisor must put his or her clients’ interests ahead of their own interests and ahead of their firm’s interests.1
By comparison, brokerage and insurance firms are held to a lower “suitability standard.” This means that brokers, insurance sales representatives and advisors operating under this standard are merely required to offer investments that are suitable for their clients. As one Forbes writer put it, this standard “doesn’t require brokers to find the best products, only ones that are ostensibly suitable for you. If an underwhelming house-brand security lines up with the vague outlines of what is considered suitable, they can still push it, even if it costs more to own or underperforms peer securities.”2
The Dodd-Frank Reforms
Much of the recent conflict in the financial services industry started in July 2010, with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. By most accounts, Dodd-Frank brought the most significant changes to the regulation of financial institutions in the United States since the reforms that followed the Great Depression.
As part of the act, the Securities and Exchange Commission (SEC) conducted a study under which it recommended that a uniform fiduciary standard be established for brokerage firms, as well as RIAs. So far, Congressional bills that have attempted to enact these rules have failed, largely due to intense lobbying by many insurance companies, brokerage firms and banks to defeat the fiduciary standard. You can learn more about the Dodd-Frank reforms here.
Why Should You Care?
Unfortunately, most investors who are purchasing investment advice and securities through traditional brokerage firms have no idea that there is a lower standard of care applied to their advisors, compared to RIAs. In its study, the SEC cited numerous surveys and study groups, which concluded that the general public had difficulty determining whether a financial professional was an RIA or a broker; instead, most believed that RIAs and brokers offered the same services and were subject to the same duties, which is not the case.
Many insurance companies, brokerage firms and banks have spent millions fighting the fiduciary standard, arguing that their clients have the right to “freedom of choice.” But in fact, that choice often isn’t in their clients’ best interests to begin with — especially when the cost of hiring an RIA, who operates at the highest standard of care, is often less than the cost of hiring “advisors” who aren’t required to live up to the fiduciary standard. What’s truly at stake for the opposition is not their clients’ right to choose, but the revenue they earn from product sales, which may or may not be the best for their clients.
What Should You Do?
The DOL’s fiduciary ruling may be the first step toward a more uniform standard of care that consumers can understand — at least for retirement plans. If the law held both brokerage firms and RIAs accountable to one defined standard for all financial advice, it would be a huge consumer victory. It is illogical to have multiple standards of care applied to consumers purchasing the same or similar securities — but unfortunately, that’s the law that currently exists outside of retirement plans and will continue to exist for the foreseeable future.
So what can you do about it?
— Start the conversation — ask your advisor if he or she is a fiduciary.
— Take advantage of resources that can help you find advisors who are fiduciaries, like the Financial Planning Association (FPA) or the National Association of Personal Financial Advisors (NAPFA).
— Find out how your advisor is being compensated — and don’t let them get away with answers like, “Don’t worry, it’s included in the product.”
— Be wary of certain products that have a history of high fees, such as annuities, structured notes, hedge funds and the like.
— Practice healthy skepticism. If any advice or product sounds too good to be true, you need to make sure you fully understand what you’re being offered, and how your advisor is being paid.
At Hewins Financial | Wipfli Hewins, we proudly serve as fiduciaries to our clients; we strongly believe this is the proper standard for providing financial advice. In our opinion, you shouldn’t have to question whether your advisor is considering your best interest when making recommendations for your financial future.