To Be Or Not To Be A Fiduciary?

If you are a loyal Cutter Family Finance reader, you have heard me harp about many things over our years together, but I think the most common topic I have covered over the last year or so has been the Department of Labor’s (DOL) landmark ruling, scheduled to become effective on April 10 this year. This rule imposes the fiduciary standard across the entire financial services industry when dealing with any type of retirement account. I’m betting the only topics I have discussed more than that DOL ruling is the unpredictability of the markets and the need to always expect the unexpected.
Well, those topics have now converged, as the DOL ruling, just two months shy of implementation after over eight years in the making, will likely be destroyed, or at least severely altered.
After only a month or so in office, I would think that President Trump would have run out of ink by now with all of the executive orders and memorandums he has signed, but on February 3, President Trump found another working pen and signed yet another memorandum; this one rolls back the fiduciary ruling and requests that his Department of Labor review it again. At the very least, this will delay the implementation of the rule; and many expect the rule won’t come this close to implementation again, at least not as it is written.
So, what does this mean to you? Investors were just two months shy of trusting their retirement accounts to an industry in which every professional would be legally obligated to work in their best interest. Now, we are looking at a continuation of the status quo, where not all financial professionals are obligated to work in the best interest of their clients. For those of us who are either licensed as Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs), nothing has changed. We are still held to the same fiduciary standard that always applied to IARs and their respective RIA firms. We are legally obligated to work in our clients’ best interest. Doing so requires transparency in fees and the avoidance of any conflict of interest. But if this rule is revoked, brokers and their brokerage houses will continue to be held to the lower suitability standard.
But all is not lost. The threat of this change has made an impact throughout the financial industry. Many brokerage firms have spent millions implementing changes to comply with the DOL rule; changes to their fee structures and changes to the products offered to investors. And many brokerage houses have chosen to keep these changes in place, despite the fate of the DOL ruling.
I think it’s safe to say that the biggest impact the DOL rule made was not within the giants in the investment industry, but rather with individual investors. Because of the publicity that this rule has received, many people are now more aware of the difference in standards throughout the industry. So even if the fiduciary standard will no longer be imposed on all financial professionals working with retirement accounts, now the public knows the difference, and investors can ensure that they are working with those within the industry who are held to that standard.
And this is especially true for you, Cutter Family Finance readers, who are more diligent about understanding your financial well-being than the average investor.
So, what can you do to protect yourself if this law is put on the shelf? You really need to ask your financial advisor questions—the most important one being if he or she is a fiduciary. If so, then he or she must charge transparent, reasonable fees, and is legally obligated to work in your best interest. In my opinion, these should always be requirements when a financial professional is putting together a comprehensive financial plan. The easiest way to determine this is by asking what licenses an advisor owns. An “advisor” who is licensed Series 7, 6, 66 or 63 is a broker (also known as a registered representative) and as discussed above, brokers generally operate from the suitability standard. The suitability standard requires that a broker make recommendations that are suitable based on a client’s personal situation, but this standard does not require the advice to be in the client’s best interest. A self-regulating organization called the Financial Industry Regulatory Authority (FINRA) enforces the application of the suitability standard.
The fiduciary standard, on the other hand, is enforced by the Securities and Exchange Commission (SEC). As mentioned above, IARs and their RIAs are held to the fiduciary standard. They hold Series 65 licenses.
But, what happens if an advisor holds both a Series 7, 6, 63 or 66 and a Series 65? This is referred to as being “dually licensed” and this is where it gets a bit more complicated. If you find yourself dealing with a financial professional who is dually licensed, it is critical to ask when that professional will be working from the fiduciary standard and not from the lower suitability standard. Understanding the answer will probably be as easy as trying to get through Woods Hole channel . . . at night . . . in the fog . . . and without navigation.
Hmmm . . . not a good place to be.
There are times that you, frankly, do not need to use a fiduciary advisor. For example, if you buy life insurance or homeowner’s insurance, an insurance agent will more than likely not be covered by a fiduciary standard and will be covered by a suitability standard. For the most part, this is perfectly fine. However, if you are looking for advice on your retirement system that involves your investments, well, this is certainly where you want to be working with an individual held to a fiduciary standard of care.
Folks, you should also ask your advisor about his or her experience, credentials and education. There are a variety of designations, all signifying different levels of experience and education, including: CFP, PFS, CFA and ChFC. With so many different professional designations, it is important to ask how your advisor’s education and experience will help in creating your comprehensive retirement system..
Whether or not the DOL heeds the president’s advice and either kills the rule, or reforms it beyond recognition, at least you will have a clear understanding of the difference between the two industry standards.
Be vigilant and stay alert, because you folks deserve more. Have a great week.