What the Department of Labor Fiduciary Rule Means for You

Paul Miller |

Perhaps the most important aspect of financial planning and wealth management is trust. Clients who seek financial advice from professionals disclose personal values, life aspirations, and sensitive financial information under the impression that they will work together to achieve and monitor client success in the best ways possible. On April 6, the Department of Labor released the final version of the long-awaited fiduciary rule, designed to ensure investment advisors put clients’ interest ahead of their own when it comes to fees and investment choices.

Rather than the looser suitability standard – merely requiring advisors to reasonably believe a recommended transaction or investment strategy involving securities is suitable for the client based on information obtained through reasonable diligence – financial advisors providing investment advice are now subject to a form of the fiduciary standard. Although the new fiduciary rule, or Best Interest Contract (BIC), will not go into effect until April 2017 and other exemption requirements not until January 2018, it means big changes for both investors and advisors. However, analysts note an overwhelming number of positive concessions and clarifications and foresee the rule as extremely beneficial to both parties overall.

The fiduciary standard upholds advisors and their companies to provide services with the care, skill, prudence, and diligence that a judicious person would exercise based on the given circumstances. This means both the advisor and the firm must avoid misleading statements about fees and avoid conflicts of interest. The end result will align the interests of both the investor and the advisor, putting them on equal footing when it comes to all the information needed to make the best decisions.

It is expected that advisors who are required to act as fiduciaries will recommend lower-fee investments to clients. In other words, when choosing between two otherwise very similar investments, a fiduciary would choose the one with lower costs. Considering the structure of much of the financial services industry, which is full of inherent conflicts of interest that do not always favor consumers, a fiduciary is very helpful. The Department of Labor even estimates that the new ruling will save investors up to $40 billion in fees over the next ten years. Investors who do not meet the minimum account standards for traditional advisors will still have many great, low-cost options. They might consider working with an advisor who charges a flat hourly, monthly, or annual fee instead of an asset-based fee.

For advisors who already hold themselves to the fiduciary standard, there will not be much of a change aside from minor ones regarding compliance and paperwork. For those whose business models surround high fees and commission, the standard will most likely be disruptive. It could either serve as an opportunity to adapt to a model that better serves the consumer, or prompt the loss of clients to more transparent, lower-cost options.

In order to determine whether or not a financial advisor and its firm act as fiduciaries, investors can simply ask to see fiduciary agreements in writing. If the advisor is compensated even partly from commissions from investments they sell you, they most likely are not a fiduciary. Advisors already acting as fiduciaries include: Registered Investment Advisors (RIA), “Fee-Only” or “Fee-Based” professionals known as I.A.’s (Investment Advisors) under the RIA. They may be members of the Financial Planning Association (FPA) or the National Association of Personal Financial Advisors (NAPFA), and CERTIFIED FINANCIAL PLANNERS™ (CFP®) when offering financial planning advice. However, some CFPs work for brokerage firms who follow the suitability standard when it comes to investment advice.

Both investors and advisors could reap several long-term benefits from the new fiduciary rule. Customers can feel confident knowing their advisors are legally and ethically required to work in their best interest, which fosters greater trust and a more fruitful relationship for both over time. As a CERTIFIED FINANCIAL PLANNER™ (CFP®) and Registered Investment Advisor (RIA) with 28 years of experience, Paul Miller and Indian River Financial Group, Inc. practice a fee-based approach, priding themselves on fostering the trust and confidence their clients deserve. Visit Indian River Financial Group to learn more about Indian River Financial Group, Inc. and the fiduciary standard they uphold.