Implementation of the Fiduciary Rule is moving at a snail's pace.

It is starting to sound like a broken record: the future of the Department of Labor’s fiduciary rule is once again in question.  Shortly after the first phase of the regulation went into effect on June 9th, the Department of Labor (DOL) submitted a proposal that would delay the full implementation date from January 1st of 2018 to July 1st, 2019: an eighteen-month delay.  The federal Office of Management and Budget has concluded its review of the DOL’s and will likely rule to approve the delay of the fiduciary rule.

To review, a fiduciary standard of care requires a financial advisor to act in the client’s best interests.  The other standard of care, the suitability standard, only requires advisors to make recommendations that are suitable, which is a much weaker standard of care.  Currently, financial advisors, also known as Investment Advisor Representatives, who work for Registered Investment Advisors are held to the fiduciary standard of care.  Registered Representatives of broker dealers are held to the suitability standard.  Hybrid advisors, acting as both Registered Representatives and Investment Advisor Representatives, may or may not be operating under a fiduciary standard of care.  It may be difficult (if not impossible) for clients to determine which standard of care their hybrid financial advisor is employing.

As we have discussed several times before in this forum, the Department of Labor fiduciary rule is a flawed piece of legislation.   For starters, the Department of Labor fiduciary rule only covers qualified investment accounts like IRAs, 401(k)s and 403(b)s.  Because the Department of Labor only has jurisdiction over employment matters, the legislation only covers retirement accounts.  Retirement accounts do account for trillions of investors’ dollars, but there are trillions of other investors’ dollars not covered by the Department of Labor fiduciary rule.  Investors may mistakenly believe that their advisor is applying the fiduciary standard to all of their investment money, when in fact the proposed fiduciary rule would only protect retirement assets.

Another flaw with the current version of the fiduciary rule is a provision known as the best interest contract exemption, or BICE.  The best interest contract exemption is a concession to the financial services industry and its lobbyists who want to continue to earn commission-based revenue through the sale of expensive investment and insurance products.  The BICE provision allows advisors to earn variable forms of compensation, i.e. commissions, instead of level fee arrangements so long as the advisor discloses the potential conflict of interest and the client signs the BICE contract.  But let’s be honest, with the mountains of paperwork that occur in the financial services industry, how many clients really know what they are signing?

What Comes Next?

What is the future of the fiduciary standard?  There are a number of scenarios that may play out in the coming months.  The DOL’s fiduciary rule may be reviewed, revised and ultimately implemented in July of 2019. On the other hand, the Department of Labor’s scope may be determined to be too narrow in scope, and the task may be handed over to a regulatory organization that can provide oversight on all investment assets.   Another possible scenario is that the Trump Administration kills the initiative entirely.

Does the delay in the fiduciary rule really matter to investors?  The DOL’s fiduciary rule is unnecessary for investors’ protection.  Investors have always had the opportunity to work with financial advisors who operate under the fiduciary standard, but investors have to do a little homework to determine who will act in their best interests.  Here is how to do your homework.

  1. Visit www.finra.org and use the BrokerCheck® search feature to look up your advisor, or any potential financial advisor you are considering. If a blue circle with the word “Broker” appears under the advisor’s name then the advisor has the potential to operate outside of the fiduciary standard and provide recommendations that only need to be suitable for your situation.  If the advisor’s listing has no mention of the word “Broker” or says “Previously Registered Broker” then you have a reasonable assurance that the advisor operates under a fiduciary standard of care.  If your search turns up no results for the advisor in question or shows “Previously Registered Broker” and/or “Previously Registered Investment Advisor”, STAY AWAY.  This individual is a professional insurance salesman masquerading as a financial advisor and only has high commission insurance or annuity products to offer.
  1. Ask the advisor questions. “Will you always act in the role of a fiduciary”?   (The answer should be Yes).   “Does anyone else pay you to advise me”? (The answer should be No)  “How do you charge for your services?” (If the answer is anything other than an annual fee based on assets, an hourly fee, or a retainer fee – this is not an advisor held to the fiduciary standard.)
  1. Look for advisors with the Certified Financial Planner™ designation. Certified Financial Planners™ are held to the highest of ethical standards, and the CFP® review board investigates its designees thoroughly.   Note:  some Certified Financial Planners™ are dually registered as Registered Representatives and Investment Advisor Representatives.  This indicates that they are affiliated with a Broker/Dealer and have the potential to earn commissions on their advice.  Proceed with caution, but if you get the correct answers to the questions listed in section two above, you are probably okay.

Finding an advisor who will act in your best interests (a fiduciary) is not that difficult.  It does require a little effort, however.  Considering the impact that it could have on your retirement, a three or more decade-long phase of your life, the effort clearly seems worth it.  Please contact the advisors of Bollin Wealth Management at 419-878-3934 if you have any questions about the fiduciary standard of duty or how to determine if your advisor is acting in your best interests.

Sources:  OnWallStreet, Investment News