All too often, important topics are glossed over because their levity is clouded by industry terminology. For example, do you remember during the recession when it took a Harvard MBA to intelligently read the newspaper? Important things were happening, but the explanations were either too complicated or too boring for most individuals to follow.
So when I write that the Department of Labor has proposed a rule that will require financial professionals to act as fiduciaries when advising clients on retirement investing, you will probably not want to hear much more, unless I tell you that it involves Donald Trump, Angela Merkel, and an international sex scandal. It doesn’t, but it’s still important. And you should definitely find it interesting because it involves your hard-earned money.
Essentially, this rule would mandate that advisors make recommendations about retirement accounts that are always in their client’s best interest. Maybe this plain language explanation highlights a more fundamental issue that you find surprising: Not all financial advisors give advice that places your interests above their own.
In the world of financial advice, there are two tiers: fiduciary and suitability. The fiduciary standard requires advisors to put client interests above their own. In other words, a fiduciary cannot recommend one investment over another to earn a higher fee; they must always recommend the best investment for that client regardless of their compensation.
Conversely, the suitability standard only mandates that financial advisors recommend investments that make sense for the client’s situation. So there is still some degree of protection for consumers; a broker cannot recommend an investment that is completely unreasonable. But they certainly do not have to go to the trouble of finding the best or cheapest investments, just those that are suitable.
So what would this proposed fiduciary rule mean? That question is the current subject of bitter debate within the financial services community. Proponents site an estimated cost of $17 billion per year to retirement accounts that results from conflicts of interest allowed by the lower suitability standard. They believe this rule will protect retirement accounts from excessive fees and ensure that they can grow through the best investments available.
However, many representatives from the industry are against it. They say the rule would leave lower income investors without access to advice regarding their retirement accounts. Many of these clients are currently served through product commissions, which pose a conflict of interest. Unfortunately, that is one of the few ways to profitably serve that demographic, and enforcing a fiduciary standard would eliminate it as an option.
This debate is far from over, and we will hear much more in the coming months. Regardless, you should be aware of the difference between the fiduciary and suitability standard that this proposal has brought to light. Both types have their place, but if you think you are paying for someone to put your interests first, make sure that’s actually what you are getting.
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.