Fiduciaries and Sweaters? – Alex

--Suitability means selling you a sweater that fits. Fiduciary duty means it actually has to look good on you.--

Ever since the U.S. Department of Labor (DOL) proposed raising investment advice standards for retirement accounts this past spring, stakeholders have talked about what effect the proposed regulation will have on the 401(k) and IRA markets.

The DOL is poised to release its final ruling in the spring that would require financial advisors to act in their clients’ best interests when dealing with retirement accounts. This higher standard of care is known as the fiduciary standard. Since PWFS is a fee-only firm, we already hold ourselves to the fiduciary standard. I am sure some of you thought that sort of regulation was already in place for all advisors, but this is far from the case!

Many clients are unaware there isn’t a fiduciary rule already in place. Studies show that 67% of people believe anyone who calls themselves a ‘financial advisor’ is obligated to give advice in their clients’ best interest. And 67% of people believe that insurance agents are obligated to do the same.

The proposed fiduciary standard would legally obligate those offering financial advice on retirement accounts to act solely for the benefit of their client. Those of us that are CFPs already practice under the fiduciary standard, but most of the industry is held only to the suitability standard. This means those advisors must recommend products that are suitable for the client in terms of the client's financial needs, objectives and unique circumstances, but those advisors do not have to recommend products or give advice that is in their clients’ best interests.

A key distinction between the two standards of care, in terms of loyalty, is that a broker’s duty is to the broker-dealer he or she works for, not necessarily the client served. Fee-only advisors like PWFS have a duty to put our clients’ interests ahead of our own at all times.

The financial industry has mounted one of the most aggressive lobbying campaigns in recent memory to defeat the rule. The Obama administration argues the fiduciary rule is needed to protect workers and retirees from high-fee products that erode their savings. The Financial Planning Coalition is in favor of the DOL’s rule stating, “Retirement investors need, more than ever, unconflicted advice that is in their best interests.”

We don’t know what the Department of Labor will finally decide on this issue, but it’s becoming apparent that something needs to happen. Implementing this rule alone won’t solve all the conflicts of interest in the financial services industry, but I see no downside for financial consumers that advisors offering advice will be legally obligated to do so in the client’s best interests. If someone sells you a sweater, be sure that it does more than just fit you. Make sure it also looks good on you as well.