Fiduciary Rule in Limbo

It’s our belief that all consumers should get their financial advice from financial advisors who are ethically bound to act in the best interests of their investment clients. In industry terms, these advisors are known as fiduciary financial advisors.  The underlying principle of operating as a fiduciary is simple: Act in the best interest of your client

We feel so strongly about the importance of operating as a fiduciary, in fact, that when we organized our business, we did so as a fee-only registered investment advisor, a business type required by law to practice as a fiduciary. We are also avid followers of legal news about financial fiduciaries.

Of late, there’s been plenty to follow.

On March 15 the 5th U. S. Circuit of Appeals ruled that the U.S. Department of Labor’s 2016 fiduciary rule overstepped its authority in requiring financial professionals to act in their clients’ best interest when managing their retirement accounts. The Wall Street Journal noted that the court “found fault with the government’s broadening standard of what is considered financial advice, who provides it and that the Labor Department would regulate it.” On the heels of that decision, the labor department, which had never implemented the Obama-era rule anyway, has officially signaled that it won’t enforce the rule, pending further review.

By and large, industry observers consider this a blow to the average investor. When it was written, the fiduciary rule was part of a sea change that was already taking place in the financial services marketplace. It was not a perfect rule – only retirement accounts were bound by it – but it was certainly a step in the right direction.

Rolling the rule back, by contrast, is only good news for large banks and insurance companies that want to continue making record profits from the savings accounts of retirees. A recent op-ed for the New York Times, Vanguard founder John Bogle noted that when “…consulting firm A. T. Kearney projected that the fiduciary rule would result in as much as $20 billion in lost revenue for the industry by 2020, it meant that net investment returns for investors would increase by $20 billion.”

There are plenty of ways that financial firms take that non-fiduciary $20 billion. For example, they often sell mutual funds charging up-front fees approaching 6 percent and then yearly internal fees on top of that. In addition, it is common practice for large firms selling proprietary products to not only charge a management fee on their clients’ assets but to charge additional fees within the products purchased on the clients’ behalf. These fees can add up to double what investment clients pay fiduciary advisors. Over the long term, the loss of principal from these charges can have a huge impact on the value of a client’s retirement account.

Under current rules, there’s no requirement that these firms try to find equivalent products that cost less to save their clients money. In fact, rather than being motivated by their clients’ best interest, financial advisors may instead be motivated by their companies, by enticing wholesalers or by sales goals to sell a stock at inflated commissions or to push clients into mutual funds with high upfront and exorbitant internal fees.

Now that it appears that the fiduciary rule is in a permanent holding pattern, what can you do to make sure that you are receiving financial advice that is in your best interest? Self-advocacy. And that starts with asking your financial advisor plenty of questions.

Some examples:

·    Do you act as a fiduciary for your clients? If a financial advisor is not willing to act as a fiduciary, that is very worrisome sign about the quality of advice they are providing.

·        How do you get paid for managing my money? Do you operate on a fee-only basis or do you receive commissions? A true fiduciary is unlikely to receive commissions.

·        Do you receive compensation from insurance companies, mutual fund companies, or any other outside entities? Outside compensation is another worrisome sign: The advice you are receiving is likely to be biased if someone besides you is paying your advisor.

·        Are you dual registered? If an investment advisor is also registered with a broker-dealer that means that part of their job is acting as a salesperson for that broker-dealer. Being a dual registered isn’t a deal killer, but it’s important to know what role that advisor is playing when they are giving you advice, salesperson or fiduciary.

The bottom line: Be vigilant. It’s your money and if your advisor isn’t working in your best interest, they aren’t really working for you. 

About the author
Brandon Montoya is the owner and chief advisor at Montoya Wealth Management. Reach him at 928-460-0972.