On today’s Finance Friday, I’m going to go a bit wonky. Normally, I would give a lot of background information explaining a topic, and then maybe a little bit on what it means in the real world. Today I’m going to do the opposite, because something important is happening in the world of personal finance. Today, the Fiduciary Rule is taking effect…kinda. So I’m going to give just a very quick explanation then talk about what the Fiduciary Rule means to you. I’ll try to do a more thorough post on fiduciaries soonish.
Warning: Depending on your political leanings, you may have some strong feelings about this topic and this blog post. I’m going to try to keep it to just the facts, ma’am. This post is not an endorsement of any political party or even a statement on how I feel about the Fiduciary Rule.
What is a Fiduciary?
noun
a person to whom property or power is entrusted for the benefit of another.
In the world of personal finance, a fiduciary is a person who has promised to act in the best interest of the client. While you might think that all financial advisors would act in their client’s best interests, there are many who are not bound by this standard. That doesn’t mean they won’t act in their client’s best interest. They just aren’t ethically or legally bound to do so.
Basically, a financial advisor/consultant/planner/call-them-what-you-want has the legal right to recommend products that aren’t necessarily the best fit for their clients. Why would they do this? Well, a financial advisor could be receiving a financial incentive to sell a particular product. Some firms also don’t allow their advisors to be fiduciaries, because the advisor is then duty-bound to the client, not the firm.
That is the extremely short and dirty version of what a fiduciary is, so on to today’s lesson.
What is the Fiduciary Rule?
In 2010, the Department of Labor (DOL) proposed a rule that would require advisors to act in the best interests of their client. This rule was withdrawn after the financial services industries, well, let’s just say they complained. A lot. The primary concerns were how it would raise costs and impact customers.
In 2015, the DOL proposed a new Fiduciary Rule. The 2015 version requires a “best interest standard” for retirement advice. It requires any advisor getting paid to provide individualized financial advice about retirement investments to be a fiduciary. Advice and retirement are the key words there. With the Fiduciary Rule, it would become a legal requirement to act in the best interest of the client, instead of just an ethical one. Furthermore, the advisor would not be able to accept any payment that would create a conflict of interest with the client’s best interest unless they qualify for an exemption. There is a broad exemption that permits the advisor to receive these payments as long as they are disclosed to the client. So it puts the onus on the client to watch out for the conflicts of interest.
Oy. When was the last time you read a disclosure? Have you read mine? It’s not applicable to this post, but you should still know about it. Guess how often I read the disclosure on a website? Almost never. Every website that uses ads or marketing is required to have a similar disclosure, just like every advisor would need to disclose conflicts of interest. But if the customer doesn’t read the disclosure, well…
Another part of the Rule distinguishes order-taking from advice. So if you call your advisor and say “buy me 1000 shares of Exxon-Mobil,” s/he wouldn’t have a fiduciary duty per the Fiduciary Rule (but may have one separately). But if you call and ask whether you should buy 1000 shares of Exxon-Mobil, that’s a request for advice. In that case s/he would have a fiduciary duty to act in your best interest and disclose any conflicts of interest.
By the way, the reason the Rule was deemed necessary was because of the money it could potentially save customers. I don’t have time or room to get into it here, but a 2015 White House Council of Economic Advisors report found that biased advice from advisors was costing investors an extra $17 billion each year.
The History of the Fiduciary Rule
This is actually a condensed timeline. You can find more thorough timelines here and here (the second link is only good through May 2016, but it has more history).
1975: The DOL issues a five-part fiduciary regulatory test.
September 2010: The DOL proposes a Fiduciary Rule.
September 2011: Enough industry folks complained about the Rule that it was withdrawn.
April 2015: The Fiduciary Rule is proposed, part deux.
April 8, 2016: The Fiduciary Rule is published, but is given a delayed applicability date of April 10, 2017 to allow financial service companies time to prepare. It isn’t scheduled to be fully implemented until January 1, 2018.
June 1, 2016: Eight financial industry and trade groups file a lawsuit against the DOL. This lawsuit, along with others, goes nowhere.
June 8, 2016: President Obama vetoes a Congressional attempt to block the rule. An override attempt of the veto fails.
February 3, 2017: President Trump orders the DOL to review the Fiduciary Rule. The order directs an economic and legal analysis of the rule. The analysis is designed to find out if there are adverse affects. If the answer is yes, or if the Rule is found to be inconsistent with the President’s priority to empower Americans to make their own financial decisions, the DOL is supposed to rescind or revise the Rule.
March 3, 2017: The DOL calls for a 60-day delay to the April 10 applicability date. The new date is – you guessed it – June 9, 2017. The DOL also calls for comments from investors and industry personnel.
April 5, 2017: The Rule’s implementation date is officially delayed until June 9.
June 9, 2017: The Fiduciary Rule is officially in effect. Your advisor must now act as a fiduciary. However, enforcement is on hold until the January 1, 2018 full implementation date.
Why doesn’t the financial services industry like the Fiduciary Rule?
First, the industry believes the current “suitability” standard is good enough. Unlike the fiduciary standard, which requires the advisor to act in the best interests of the client, the suitability standard says the product just has to meet the requirements of the client’s financial needs, objectives, and unique circumstances, even if it isn’t the best option.
Another oft-quoted reason is that the Fiduciary Rule will increase costs to ensure compliance. Of course, those costs will be passed on to the customer.
The Rule could also affect smaller companies the hardest because they won’t have the money or expertise to fully implement the Rule. Or, companies may choose not to service retirement accounts for small organizations, because they aren’t earning enough to cover the costs. Remember, the Fiduciary Rule only applies to retirement accounts – not all investments. So financial services firms could potentially stop servicing retirement accounts while staying open servicing other investments.
Keep in mind that some advisors are already fiduciaries, even without the Rule. You can certainly find a fiduciary to help with your finances not matter what ends up happening to the law. But it’s not a huge number, and it’s nowhere near a majority of advisors. Make sure you do your research before picking an advisor.
To learn more
I found this article from Money to be useful in identifying key things to consider, especially if your own retirement account will be affected by the Fiduciary Rule. Check it out if you have a non-fiduciary advisor or just want to learn more.
In related news, the House voted yesterday to repeal portions of Dodd-Frank. Dodd-Frank is the legislation that was enacted in 2010 (after the Great Recession) to regulate the banking industry. The repeal is now at the Senate for their vote. The bill is known as the Financial CHOICE Act and it could have effects on the Fiduciary Rule as well.
Are you in favor of the Fiduciary Rule? Leave your thoughts in the comments!
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