A fiduciary is an individual that is to act in a client’s best interest and put the client’s interests above their own.
Last year the Department of Labor introduced new legislation that expands the definition of the Fiduciary Rule and was subsequently signed by then-President Obama. The new regulations were to be phased in from April 2017 to January 2018. However, they are now delayed until June 2017.
Earlier this year, President Trump’s advisory team criticized the rule and Trump signed an executive order delaying its implementation. The DOL is defending the rule in multiple lawsuits; as it stands today, the phase-in will start this June.
The new rule forces advisors to reveal any potential conflicts of interest and to clearly disclose all fees and commissions.
The new rule will expand the definition of “investment advice fiduciary” under the ERISA Act, which means that all financial professionals who work with retirement plans or discuss retirement advice are bound to the fiduciary standard.
Registered Investment Advisers (RIAs) are already meeting this standard, so the biggest change is upon those held to a lower standard, those that work on commission, such as investment brokers and insurance agents. Brokers and agents are currently held to a suitability standard, which meant that so long as the recommendation meets the client’s needs and objective, it was appropriate.
If an advisor continues to work on a commission basis, they must provide clients with a disclosure called a Best Interest Contract Exemption (BICE), in cases where a conflict of interest may exist.
Retirement plans that are covered by the change include:
1. Defined-contribution plans, such as 401k plans, 403b plans, employee stock ownership plans (ESOPs), SEPs, and Simple IRAs
2. Defined benefit plans
3. Individual Retirement Accounts (IRAs)
While the status is still somewhat in the air, an investor should focus on the larger issue: should they seek an advisor willing to hold themselves out as a fiduciary?
The quick answer: yes!
Many industry-leading groups, such as the CFP Board, CFA Institute, the National Association of Personal Financial Advisors (NAPFA), and the Financial Planning Association (FPA), are advocating for the new fiduciary rule.
A trusting relationship is imperative if you are entrusting your money and financial advice to an advisor. Do not accept an advisor’s lack of transparency surrounding conflicts, commissions, and fees.
Find a professional willing to hold him or herself to the highest ethical and professional standards: someone willing to put your interests ahead of theirs at all times.