The DOL Fiduciary Rule and Why It Matters to You

According to a report from the President’s Council of Economic Advisers, “Conflicted advice is costing America’s working families about $17 billion per year in IRAs alone.”

Early in 2016, the Department of Labor (“DOL”) successfully passed legislation regarding the Fiduciary Standard.  It will forever change the financial services industry and how advice is delivered to consumers.  

Historically, when the financial services industry emerged, there were traditional “stockbrokers” who recommended investments to their clients.  The broker (registered with a broker/dealer firm) received a commission, and the client earned or lost money on the investment.  Pretty straightforward, right?  Essentially, most stockbrokers were salespeople … the more investment products they sold, the more money in their pocket. 

Later, some brokers wanted to focus less on sales and more on comprehensive financial planning.  A new wave of firms emerged: fee-only RIAs, or Registered Investment Advisory firms.  Professionals in the RIAs focused on independent advice often tied to the total amount of money being managed, also called “assets under management.”  Services broadened to include financial planning concepts like cash flow & debt management, income tax planning, education funding, insurance evaluation, and more.

A financial advisor will generally fall in one of three camps:

  1. fee-based broker,
  2. fee-only RIA, or
  3. a hybrid of the two structures.

So, let’s talk about the fiduciary standard and what it means for you, especially when seeking financial advice.

Fiduciary

n. from the Latin fiducia, meaning "trust," a person (or a business) who has the power and obligation to act for another under circumstances which require total trust, good faith and honesty.

In the case of investment advice, when a professional acts with a fiduciary duty, he or she is acting in your best interest.

On the other hand, the suitability standard faced by many traditional brokers was more lenient than fiduciary.  

Suitable = appropriate to a purpose

Do you see the difference?  For my female readers, maybe this dress example will help a little.  You go into a store and try on a dress.  You still aren’t sure if it looks good so you come ask the opinion of the fitting room clerk and she says, “You should buy the dress.  It fits.”  The clerk is operating under the suitability standard in making that statement.

Now suppose you step out of the dressing room with the same dress but the clerk now has a fiduciary standard, and she doesn’t think you look great in the first dress.  Her appropriate response would be “This dress is OK, but I think you would look fantastic in this other dress.  Why don’t you give the other one a try?”  Under the fiduciary standard, she cannot sell you the first dress if it is not in your best interest.  

Lesson learned?  With the suitability standard, the dress fits.  With the fiduciary standard, the dress fits AND you look great in it.  Which one would you rather have?

Of course, this is oversimplifying the new law that took years to define.  For a detailed FAQ on the new law, please click here.  And it may just be the beginning.  Some other notable items about the new DOL Fiduciary Rule include:

1) For brokers still on a fee-based or commission model, the fiduciary standard only applies to retirement accounts.  That means if you, as the client, are seeking investment advice from your broker about a taxable non-retirement account, the less-stringent suitability standard applies.  

2) Since the DOL can only create the rule and not regulate it, clients cumulatively have more power to sue if there is any suspected breach of fiduciary duty on a retirement account.  Now, financial advisors must sign a contract with the client for each retirement account over which the planner is offering advice.

3) Based on last year's parameters, the new rule should go into effect April 10, 2017. However, it remains to be seen whether the newly elected President or Republican-controlled Congress will delay or rewrite the rule altogether. 

4) If you have concern over taxable non-retirement accounts under the new rule, please consider a fee-only financial advisor.  NAPFA’s Find An Advisor tool is a great free national resource.  I am a member of both NAPFA and XY Planning Network

I personally believe the new DOL rule is a step in the right direction but hope the fiduciary standard will eventually apply to ALL accounts – even taxable ones.

What do you think?  Do you rest easier knowing that financial advisors will eventually be on equal footing when they provide retirement guidance?  Please share your thoughts below.

All the Best,

Deb Meyer, CPA, CFP(R)