Fiduciary – What’s In a Word?
2017 may be the year a fiduciary standard finally takes center stage in the personal financial advice profession. The Department of Labor’s (DOL) Fiduciary Duty Rule, scheduled to be implemented on June 9th, expands the “Investment Advice Fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA).
While changing the definition of one word in a 40 year old piece of legislation may sound innocuous, it has been the focus of staunch opposition from the financial services industry (read, “Wall Street”), who have thrown a consistent onslaught of hurdles, lawsuits and delays in its path.
Why should one five-syllable word matter to you? Simply put, the fiduciary rule requires all financial advisors and brokers to put your interests above their own when working with your retirement accounts. In order to recommend investments to retirement savers, they will have to act as fiduciaries, much like lawyers and doctors.
Why is fiduciary duty important? This press release from the Obama White House sums it up:
“A system where Wall Street firms benefit from backdoor payments and hidden fees if they talk responsible Americans into buying bad retirement investments—with high costs and low returns- isn’t fair. These conflicts of interest are costing middle class families and individuals billions of dollars every year. On average, they result in annual losses of 1 percentage point for affected investors.
Because of outdated rules protecting retirement savings, we’re seeing bad incentives and bad advice lead to billions of dollars of losses for American families saving for retirement every year—with some families losing tens of thousands of dollars of their retirement savings.”
That statement was released in February 2015. A full two years later, despite a strong effort by the President, the fiduciary rule still hasn’t been implemented. Delay after delay, we wait and watch as the current White House sways under the pressure of Wall Street’s might.
Of course, fiduciary investment advice is nothing new. As you may know, advisors who are Registered Investment Advisors (RIAs) already operate under a fiduciary standard and have been doing so for many years. RIAs (like Blankinship & Foster) are required to put their clients’ interests before their own or that of their firm, which means forgoing investments with high costs and poor performance that may be more profitable for the firm, but that are less favorable for their clients.
Representatives of brokerage firms, on the other hand, only have to recommend investments that are “suitable” for you. That means if a representative has the option between two similar mutual funds, both generally “suitable” for you, but one pays out a higher commission, he or she can put you in that one—even if it has much higher fees.
Of course, fees aren’t the only obstacle an investor has to navigate. Risk can be an even bigger factor, as conflicted advisors may push investments that are far riskier than what is truly “suitable” for an investor. Risk can show up at the worst times, as was painfully clear during the financial crisis. We take great care in helping our clients control risk.
Many who understand the importance of fiduciary duty point to compensation as the reason some advisors don’t always put their client’s best interest above their own. Advisors operating on commissions have an obvious conflict of interest: they profit from recommending investments and vehicles that will pay a higher commission. The industry has been evolving away from direct commissions toward “fee-based” compensation, however fee-based advice can be even more conflicted, as it can involve kickbacks, incentives, “Soft Dollars” and “Revenue Sharing.” Worse, it can take away the advisor’s ability to steer a client into better investments, even if he or she is honestly trying to act in their client’s best interest. At Blankinship and Foster, we are strictly “Fee Only”, meaning we do not receive compensation from anyone other than our clients.
The new Fiduciary Duty Rule, (if it does finally get implemented), should be a good thing for investors. Both commission-based and fee-based advisors will have to enter into a “Best Interest Contract” with retirement investors, where they agree in writing to act in their client’s best interest.
As fee-only advisors who have been fiduciaries for over 25 years, we can only say, it’s about time!
To learn more about our fiduciary advice and how we can help you achieve confidence, clarity and direction in your finances, contact us.