The Fiduciary Standard
Yesterday, the Department of Labor implemented new rules that requires all financial service companies to act as a fiduciary for their clients. Starting April 10th, 2017, the Fiduciary Rule will prevent financial advisors from charging outrageous fees in client retirement accounts. This important change is like many other financial news stories… long, boring, and complicated. Of course, like many stories like this, it’s very important. Hopefully this will clear things up.
Why should I care about the Fiduciary Standard?
Well, the story was on CBS This Morning… So yea, it’s pretty big if someone thinks it’s important enough to distract you from drinking coffee. Basically, the Obama Administration decided it was time for Wall Street to put the interests of clients ahead of the banks. This is an amazingly radical concept… for Wall Street. Pretty much everyone else has been asking for these changes for decades.
What’s Fiduciary Rule change about?
Well, there were two sets of standards out there. One set of rules was called the suitability standard. Basically, your salesman had to ask general questions about how long you were investing, how much money you had, and how comfortable you were with risks and investment products. Once they collected that info, they could sell you whatever they wanted too. Which usually meant you were getting the product that paid the salesman the most.
On the other, there was the fiduciary standard. Only a few advisors had to follow this standard. Financial service employees with credentials such as the Certified Financial Planner (CFP) designation are required to act under a fiduciary standard. A fiduciary is someone who has to place the client’s best interest ahead of their own, even if it leads to lower pay for the same work.
Wait, two rules…. And one let my financial advisor rip me off?
Well, maybe not rip you off. After all, the behavior was perfectly legal. In fact, Wall Street fought to keep it legal. So, while you technically weren’t getting ripped off, you probably didn’t get the services you thought you were paying for either. Under the suitability rule, you paid commissions. The commissions were supposed to cover ongoing advice and guidance.
The reality was that many people who paid commissions never heard back from the person who sold them an investment. This was especially true at financial companies that have call centers. There was little chance that a person would still be working at the firm after a few years.
Which standard was my financial advisor under?
That depends. If your advisor doesn’t mention that he is either Fee-Only or a fiduciary, it’s most likely that they did not act under the fiduciary standard. Quite honestly, those that have worked as a fiduciary prior to the rule change are very proud of that fact. It takes far more effort to act as a fiduciary instead of a salesman.
Is this really going to help my retirement saving?
I’d like to think so, but the reality is somewhere between maybe and of course not. Wall Street has been fighting the change for years. The U.S. Chamber of Commerce has considered suing the Department of Labor over the rule changes. Already, many feel corporate interests have taken the teeth out some of the more important rule changes. Of course, large financial companies are already looking for ways around the rule. And finally, a change in Presidential administrations could unwind everything.
How has the rule affected your financial planning business?
Not at all. I’ve been under the fiduciary standard since 2011. I’ve worked at banks that chose the fast money approach the suitability standard allowed. Frankly, I was disgusted by the people who acted so cavalier towards clients. PHXplan.com was established as a direct response to those kind of people. I’d rather do better for my community than profit off their backs.
The CFP Board, along with their partners in the Financial Planning Coalition (Financial Planning Association and the National Association of Personal Financial Advisors) have been supported of the Department of Labor’s effort to update to this 40-year-old rule. Advisors working under this standard have consistently supported the idea of fiduciary level advice and guidance. Plainly speaking, this is how things should have always been.