The dictionary defines the word fiduciary as an adjective “involving trust, especially with regard to the relationship between a trustee and a beneficiary.” As a noun, the dictionary defines fiduciary simply as “a trustee.”
Over the past several months, the financial services industry has heard the word fiduciary over and over. Some of you may have heard this word a lot lately as well. Under President Obama, the Department of Labor finalized a rule addressing conflicts of interest in retirement advice and retirement planning. I want to take a few minutes to describe what this change is and what it means to the consumer.
The Employee Retirement Income Security Act of 1974 (ERISA) has been guiding financial planning since its passing in 1974. That hasn’t changed. What is changing is that all financial professionals who work with retirement plans like IRAs or provide planning advice are now fiduciaries bound legally and ethically to the standards that meet that legal status.
The change here is immense. Historically financial professionals operated under the suitability standard. The suitability standard meant that the financial product I am offering had to be suitable for you. It had to meet your particular need and objective, and as long as it did so, it was deemed appropriate. Now the financial product must put your best interests first rather than simply be suitable.
Some of you might read that and ask what is the difference? Others might read that and find it strange that your financial adviser wasn’t already held to a fiduciary standard. The ultimate factor here is compensation. Does your adviser put your needs ahead of how he or she gets paid? That is the ultimate question the Department of Labor was trying to answer. It felt the best way to ensure that Americans are getting the best advice and financial service possible was to propose new regulations with the intent to protect consumers from conflicts of interests and require all fees and commissions be clearly disclosed. This is to make certain that the financial professional is working unconditionally in the best interest of the client. The resulting effect of the rule will still allow both commission-based and fee-based compensation models, so this question will ultimately be answered by each individual consumer and the decisions they make.
As you can imagine the reaction to this rule has been mixed and vehement. While all parties agree that the adviser should be under the fiduciary standard, the financial services industry has had problems with the implementation and onerous regulation it adds to what they see as an already heavily regulated industry. Consumer advocates look at it as increasing the status of financial adviser to that of your doctor or attorney. I am of the opinion that both sides have merit. President Obama did put this regulation on the fast track to implementation knowing that his administration is coming to an end and he felt strongly that financial reform was going to be a big part of his legacy. Because of that fast track, it is my opinion that a lot of the regulation was hastily arranged and it did not provide much time for the industry to implement it. On the other hand, I am in full support of advisers operating under the fiduciary standard. I cannot think of anyone who would disagree with that. Clients need to know that the advice they are receiving is genuinely meeting their needs and no conflicts of interest are getting in the way of their getting that advice.
The initial implementation was planned to begin in April 2017, but President Trump has delayed that date for 180 days. Upon implementation, you can think of this as almost a “dry run.” The recent election put all of this into confusion. Prior to the announcement of this delay, the industry had begun to implement many of the details the Department of Labor was requesting, and if Hillary Clinton had won the election, we would have seen that continue. With the election of Donald Trump, wild speculation on the future of the rule has put everything into question. Will Donald Trump and the new head of the Department of Labor continue to implement something that the previous administration enacted? When President Trump’s administration announced it was reviewing all pending legislative action, industry analysts stated they believed that because this has not been fully implemented, this is something that the new administration will look at. Analysts went even further to say that the implementation could be put on hold until it can be reviewed, and they were right.
Whether the current rule will be implemented exactly as is written today remains to be seen. I stated that I did believe the new administration will delay the official implementation until it can be reviewed by the new leaders in Washington. Will the full impact of the rule cause advisers to no longer work with the middle class because of fear of lawsuits like those against the rule have clamored? Will this create more financial security, as President Obama hoped it would? These questions remain to be answered, but what isn’t going away, and shouldn’t go away, is the fiduciary standard by which financial advisors are held.
Premier Planning Group is an independent firm with securities offered through Summit Brokerage Services Inc. Member FINRA/SIPC. For more information, call 443-837-2520.