The Department of Labor recently passed a new law that establishes a new fiduciary standard for retirement accounts, including IRAs. This ruling has made headlines in recent months because it has significant ramifications to the financial advisory business and how financial advisors do business with their clients.
Currently, there are two regulatory standards of care in the financial industry: (1) The suitability standard and (2) the fiduciary standard.
The Suitability Standard
In practice, this standard is similar to how it sounds. A broker is permitted to make recommendations based on what is suitable to a client’s personal situation. After collecting information about the client’s income, assets and financial situation, the broker can make product recommendations that are suitable for the client.
The Fiduciary Standard
This standard is the suitability standard taken an extra step further by assuring advisors focus only on what is best for the client.
What’s the difference?
Let’s just say you know very little about cars and decide to purchase a new vehicle, so you pay a visit to your local Chevy dealership. You describe the features of what you’re looking for and what you describe sounds exactly like a Honda Pilot.
Under the rules of the suitability standard, the car salesman may say, “We have some Chevy Tahoe’s right over here that have all the features you’ve described.” The car salesman makes the sale and earns a commission. As a result, you drive off the lot with a car that certainly suits your needs, but may not have necessarily been what was best for you.
If the fiduciary standard was applied to the same situation, the car salesman would have an obligation to say, “That sounds exactly like a Honda Pilot. We don’t sell those cars here, but the Honda dealership down the street does. I have a Chevy Tahoe here for you that has all of those features, but it’s more expensive and isn’t exactly what you described. But we can take a look if you’d like.”
Haven’t you always done what’s in my best interest?
If you’re a client with us here at Blom & Associates, this is the first question you’re probably asking, and the answer is yes! As independent financial consultants, we are free to recommend any investments or financial products that will help our client’s pursue their financial goals. To liken what we do with the example above, the good news is we have the investment and financial product equivalents to a Honda Pilot or Chevy Tahoe available. Our independence means we’re not captive to providing the products of any one particular company (which may or may not have the best products), enabling us to recommend products we feel are appropriate to our client’s individual circumstances and in their best interests.
We know our role is to help our clients navigate the myriad of financial decisions they face. We take the trust our clients place in us very seriously, which is why we’ve intentionally created a consultative business model that focuses on “planning” versus “selling.” This allows us to always focus on what’s best for our clients.
Why all the press over the changes?
The rule has created a shockwave through the investment world. Few broker-dealers and advisors have objected to the intent of the rule, but they have been challenged by operational aspects due to the logistical nature of its implementation. The ruling is complex and contains many nuances that have been left open to interpretation, leaving substantial portions for firms to determine how to implement.
Opponents in the industry argue the ruling is an act of over-regulation that means well, but may end up harming consumers in the long-run. The rule is expected to increase compliance costs dramatically and has the potential to affect affordable advice provided by advisors to lower and middle class families. With the rule also dealing with areas of morality, some opponents also question whether the rule would actually produce the results it attempts to achieve. On the other hand, proponents argue the rule creates a better financial planning environment that will result in lower fees and less conflicts of interest.
A Trump presidency may throw a wrench in the ruling.
With a new Trump administration entering the White House bent on ending over-regulatory practices, a new Labor Secretary may halt the DOL/Fiduciary Rule in its tracks prior to it going into effect on April 10, 2017. The administration may also propose an alternative.
What does the change in regulatory standards mean for you?
To reiterate, at Blom & Associates, we will always put the interests of our clients first regardless of the regulatory standard we’re required to operate under. Logistically, the components of the law that are still left open for interpretation and the impact of a Trump administration on the law means we don’t know exactly what clients and/or accounts will be impacted by this new regulation. We will certainly provide updates as we learn more and guide our clients every step of the way if changes are needed.
If you or your family would like to know more about the DOL ruling or how we can help you, please contact us at (209) 857-5207. If email is more convenient, please send inquiries to: email@example.com or firstname.lastname@example.org.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.