October 10, 2017 – You may have noticed the word “fiduciary” bouncing around the news lately. The Department of Labor (DOL) announced last April that financial advisors who provide retirement investment advice would be held to a new fiduciary rule — that is, they would be required to put investors’ interests ahead of their own. This debate has gone on for many years, and the DOL ruling resulted in applause in some corners, angst in others, and spirited dialogue and debate all across the nation.
One of the benefits of this national debate is the distinction that investors are being provided between a “fiduciary-based advisor” and a “commission-based broker”. As a quick summary, brokerage firms whose compensation is in the form of commissions are generally required to meet a “suitability standard” when offering investment recommendations to their clients, thereby recommending product(s) “suitable” in meeting clients’ goals. Conversely, Registered Investment
Advisory (RIA) firms are required to meet the “fiduciary standard” which requires an advisor to act solely in a client’s best interest. It is easy to understand the potential conflicts with the former: a commissioned brokerage firm may recommend a suitable product costing one price, while other suitable products may exist at significantly different prices. Conversely, an independent fiduciary-based advisor, charging an advisory fee, will provide recommendation(s) that takes into account all factors including price when recommending investment strategies that are in the best interest of the client. These DOL rule changes would require anyone serving retirement plans and IRA clients to act as fiduciaries, affecting the compensation arrangements and/or the actual recommendations offered to investors.
It is hard to imagine how such a simple concept as requiring investment advisors to act in the best interest of their investor clients could possibly receive such heated debate for so many years, but large investment firms are scrambling to cope with such a potentially dramatic change in their approach to advising clients. There are many independent firms that fall into the category of “fiduciary-based advisors” who avoid all of this debate because, as fiduciaries, they are already held to the highest legal and ethical standard in the industry — avoiding conflicts of interest, and providing fiduciary-based guidance and services that are always in the best interest of their clients.
Granted, there are many issues in the “fine print” with the new fiduciary rule that are worth debating. No matter how things play out with the fiduciary rule, RIAs won’t require any significant changes in how they deliver advice. We’ll have to wait and see how the brokerage side of the business is impacted.
This post is an excerpt from the Dopkins Risk Management & Corporate Compliance newsletter. To read the complete publication, please click here.
About the Author
Craig R. Cirbus
Craig manages the wealth of many high net worth individual and business clients of the firm. Additionally, he helps advise corporate clients on their ERISA retirement plans. He has over a decade of experience in investing and wealth management.