A short note in advance of the article: Since our inception, True Wealth Design has acknowledged fiduciary responsibiltiy to always and solely act in our client’s best interests. We set up our business this way on purpose, as we thought it was the obviously right thing to do.
Anyone searching for investment advice is confronted with many choices of service providers operating under titles such as Certified Financial Planner®, financial consultant, registered investment advisor, VP of Investments, stockbroker, insurance agent, etc. These titles can be confusing and some used more so for marketing purposes. They also do not make clear whether the professional is legally required to have a client’s best interest in mind when making investment recommendations.
You may have read that the Department of Labor (DOL) recently announced a substantial overhaul in the regulation of financial advice given on retirement savings. Central to this discussion are two terms: fiduciary and suitability. What does it mean for an advisor to operate on a fiduciary standard, and how does this differ from a suitability standard?
The Suitability Standard
Historically, licensed representatives of broker-dealers such as Merrill Lynch, UBS, LPL, Ameriprise, and others are required under the securities laws to judge the suitability of a product for a prospective investor. Suitability is based primarily on that person’s financial goals, income, and age. Under this suitability standard, the rules do not legally require the following: a recommendation of the most cost-effective product, a disclosure regarding conflicts associated with the investment, or disclosure of the compensation received when making that recommendation. So in effect, the investment must be suitable but not necessarily in the client’s best interest. What consumer knowingly wants to sign up for that?
These same representatives often obtain registration as investment advisors, becoming dual-registered. As a registered investment advisor, a fiduciary standard of care is required. This dual registration is cumbersome at best, as the representative may sell a commission-based product (suitability standard) but also provide investment advice (fiduciary standard) to the same client in the same meeting with varying standards of care. A high degree of skepticism should be raised as to whether this is fully disclosed and understood by the client of dual-registered representative.
The Fiduciary Standard
Clients of registered investment advisors that have no broker/dealer affiliation have long been receiving more transparent, fiduciary advice. A primary goal of the recent regulatory changes was to create a single fiduciary standard for retirement financial advice. It is important to note that the DOL rule only pertains to retirement accounts such as 401ks and IRAs but not to non-retirement accounts such as brokerage accounts jointly or individually titled. The new rule takes effect in April 2017.
The DOL has described a “fiduciary” as someone required to act impartially and provide advice that is in their clients’ best interest, and in doing so, must act with the care, skill, prudence, and diligence that a prudent person would exercise, based on the current circumstances. Fiduciaries are typically compensated by payment of a fee rather than a commission, and a fiduciary must avoid misleading statements about fees and conflicts of interest. Clients can expect that a fiduciary will act with transparency and avoid prohibited conflicts of interest. Fiduciaries are also personally liable for breaches of their fiduciary duties with recourse available through civil actions in the courts.
Implications for Investors
The DOL rule is a big step in the right direction for consumers. Yet, there have been exemptions carved out and fiduciary advice still will not necessarily apply to non-retirement accounts. Registered investment advisors without broker/dealer affiliations will continue to be obligated to provide fiduciary advice on all accounts without exception.
If you are unsure whether your advisor is providing a fiduciary standard of care, ask them. Then ask them to acknowledge it in writing.
If you have been sold a financial product, specifically commission-based products such as indexed or variable annuities, non-traded real estate, or other private investments that typically pay high commissions and fall under the suitability standard of care, it may be a good idea to obtain a second opinion from a Certified Financial Planner® at a registered investment advisor without broker/dealer affiliation. They can help determine whether these products are truly in your best interests.
Kevin Kroskey, CFP®, MBA is President of True Wealth Design, an independent investment advisory and financial planning firm that assists individuals and families with their overall wealth management, including retirement planning, tax planning and investment management needs.