The Department of Labor is introducing an important new rule regarding retirement plan accounts, which will be phased in during 2017 and fully implemented by 2018. Under this new rule, financial professionals who consult retirement savers will be held to a fiduciary standard. In other words, they will have an ethical and legal obligation to always act in a client’s best interest.
Many financial professionals already abide by a fiduciary standard. Thanks to the new rule, even more will. In fact, the fiduciary standard may soon become the “new normal” in the financial services industry.
It has not always been so. Historically, investment professionals have been asked to uphold a suitability standard when making recommendations to their clients. Under the suitability standard, financial products are recommended considering a client’s age, income, net worth, and savings goals. Many in the brokerage industry believe this standard has worked well.
The Department of Labor disagrees. In its view, the suitability standard leaves an open door for conflicts of interest to affect client-advisor relationships. In theory, many investments or products could be found suitable for an investor, and the one most recommended could be the one that results in the largest commission for the financial professional offering the advice.
So, which financial services professionals uphold a fiduciary standard and emphasize fee-based or fee-only planning?
Registered Investment Advisers (RIAs) work by a fiduciary standard. They are regulated by the Securities and Exchange Commission and/or state securities authorities, and charge their clients fees for most or all of the services they provide. Both individuals and firms can be RIAs.
Certified Financial Planner™ practitioners also uphold a fiduciary standard. These individuals abide by the code of ethics and rules of conduct articulated by the Certified Financial Planner™ Board of Standards in Washington, D.C. They are directed to provide their financial planning services as fiduciaries.
Sometimes, the decades-old compensation structure of the financial services industry can impact even those financial professionals serving as fiduciaries. For example, a CFP® practitioner or an SEC-regulated investment adviser may also sell insurance products that provide commissions, and help clients invest in certain brokerage accounts linked to commissions.
In short, the financial services industry is not perfect. The new Department of Labor rule demanding a fiduciary standard from the professionals advising retirement accountholders takes a big step toward remedying some of its imperfections.