Recently, the Department of Labor (DOL) issued a memorandum that clarified the implementation of its fiduciary rule, after a sixty day delay, with expanded enforcement policies. The fiduciary rule was formally proposed by the Department of Labor in April 2016 and was passed shortly thereafter. The rule is now scheduled to be phased in from June 9, 2017 through January 1, 2018 per the DOL’s recent announcement.
The fiduciary rule is designed to make all financial professionals who provide retirement planning advice or work with retirement plans accountable to the fiduciary standard, as opposed to the more relaxed suitability standard. It demands that advisors act in the best interests of their clients and place their clients’ interests above their own with no room for conflict of interest.
This will now require all retirement planners and other related professionals to be legally obligated to put their clients’ best interest first – not just to find investments that meet the clients’ current objectives. The rule would cover professionals who work with Individual Retirement Accounts (IRA), defined-contribution retirement plans, like 401(k) s and 403(b) s, as well as defined-benefit plans (pensions).
The Fiduciary Standard – what is it?
In a financial context, a fiduciary is required to act in the best interest of the person or party whose assets they’re managing. Many people mistakenly think that all financial industry professionals are bound to this standard, but that’s not the case. Brokers, insurance agents, and other financial professionals can now use a lesser standard – a suitability standard. The fiduciary standard is much stricter than the suitability standard. A suitability standard requires is that as long as an investment meets a client’s needs and objectives, it’s appropriate to recommend to clients.
One of the biggest benefits to hiring a fiduciary, like Washington Trust Bank, to handle your investments and other assets is that a fiduciary must put his or her client’s best interest ahead of their own profit. The new fiduciary rule has recognized that those that are not bound to a fiduciary standard may recommend investment products to their clients because they offer the highest commissions, and not because the products were actually in their clients’ best interest. In addition to the example of not selling high-commission investment products, the rule expands to advisors who cannot make trades in client accounts for the sole purpose of generating higher commissions, and cannot buy securities for their own accounts prior to buying them for a client.
Why should I be concerned?
The fiduciary rule sounds great for investors. It would protect millions of investors from paying unnecessarily high commissions on investment products, and from buying investment products and making decisions that aren’t in their best interest. In fact, a 2015 report from the White House Council of Economic Advisers estimates that conflicts of interests by brokers cost retirement investors up to $17 billion per year. Also in that survey, these savers’ investment return was approximately 1% per year lower due to conflicted advice. That adds up.
One of the biggest arguments against the fiduciary rule is that it could unfairly impact smaller and independent retirement advisors, who might not have the ability to afford the costs of complying with the new regulations. The U.K. passed similar rules in 2011, and the number of financial advisors has since dropped by 22.5%. The fear is that a similar thing could happen here.
There is, as expected, strong opposition from affected advisors and companies in the financial industry. Many retirement planning professionals are obviously not in favor of the fiduciary rule and would rather be held to a suitability standard, as the fiduciary standard could affect compensation both in terms of lost commissions and the added cost of complying with the new regulations. In fact, it is estimated that the implementation of the fiduciary rule could cost the industry an estimated $2.4 billion per year.
The opinion of the impact of the implementation of the fiduciary rule and how it will affect consumers continues to be varied. What we understand at Washington Trust Bank is the importance of the fiduciary role in financial discussions and management. As a fiduciary since 1902, we recognize the value to our clients and potential clients and where their best interests are placed in our advisory. There would be no change to Wealth Management & Advisory Services’ management or service, as we will continue to administer our accounts under the fiduciary standards we have always used.
The views or opinions in this article are those of the author and do not necessarily represent the views of Washington Trust Bank or senior management. Washington Trust Bank believes that the information used in this blog was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinions expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
As Vice President and Senior Wealth Advisor, Greg provides financial analysis to high net worth individuals. He is the author of several articles for various publications and nonprofit organizations on estate and financial planning subjects.