Buying Back Honesty: New Fiduciary Guidelines are a Game-changer

  • 051916
  • 2 minutes

Change is an equalizer—we all have to face it. Recently, the financial advising arena was shaken by legislation that modifies fiduciary standards, and the tremors are likely to be felt for some time. Why all the fuss?

A Higher Rate of Interest

The Department of Labor (DOL) has been on alert for any and all moves by investment and retirement advisors—done knowingly or not—that could present a “conflict of interest.” We’re talking exorbitant fees, purposely misdirected financial advice, and an unhealthy influence on client decisions—all this while sporting a trustworthy guise. Sad to say, this happens at times.

“It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first. You can’t have a conflict of interest.”
President Obama

Thankfully, the majority of us in the financial advising sector have always held client interests to be higher than our own. For some reason though, popular opinion shouts a different message. Knut Rostad, president of the Institute for the Fiduciary Standard notes, “The anti-fiduciary and distrustful investor climate is striking. More striking than at any time in recent history.” And unfortunate instances of opacity and partiality only serve to further sully this distorted image. The result? The DOL and this administration feel it’s high time to take the lead and set some (more) guidelines.

That’s the clear goal behind recent changes to fiduciary rules, issued April 6, 2016, and ramping up to full implementation by the beginning of 2018. Some are already railing against the new law, while others feel it’s a “great victory for consumers.” So just what do those 1000+ pages hold?

Casting Our Vote

First off, this term—fiduciaryisn’t very well-known or -understood. And no wonder, for while the definition is pretty cut and dry—“responsible for managing the assets of another person”—the scope is broad. With both legal and ethical responsibilities at play, and job function taking precedence over title held, the range of those who fit the fiduciary model is wide. Acting under the stricter “best interest” standard—as opposed to the looser-fitting “suitability standard”—fiduciaries should be prepared to put client interests above all else.

“This is no longer a marketing slogan. It’s the law.”
Thomas E. Perez, Secretary of Labor

In line with client interests, the DOL has seen fit to begin a fundamental shift from a commission- to a fee-based payout structure. Their aim? Protecting the everyday joe from methods that could potentially, in the long run, hurt them financially. Basically, these guidelines put up roadblocks to any individual acting as a fiduciary who would attempt to manipulate investors’ finances for personal gain. The new law does make allowance for some commissions, but only if clearly spelled out in a contractual agreement. Regardless of how payment is made though, advisor suggestions will have to clearly demonstrate benefit to the client.

Looking to shave 1% in yearly fees, the DOL hopes to plunk an estimated $17 billion back in investors’ pockets. All those nickels and dimes sure do add up. Yet, regardless of how responsible that sounds, there’s always another side, a sub-story, and folks will be duking it out about the pros and cons of the DOL’s move for quite some time. Our vote’s in: we’re siding with you, the client.

Ask Any Joe, It’s Good To Be Frank

We love a silver lining, and in this case, we’re anticipating that disruption will bring opportunity. With a probable wave of software upgrades, stronger business relationships, greater efficiency, and better client service, the DOL may be back-patting before too long. Of course, that’ll be after adjustment and fine-tuning, and maybe a general shift in attitude. But with change, we can expect that. What really needs to keep happening is open, honest dialogue between investors and advisors. Only when goals, expectations and concerns are clear can “best interests” be put in proper focus. Once that’s done, it’s obvious that ultimately, what’s in your best interest, is in ours too.

Securities offered thru Sterne Agee Financial Services, Inc., member FINRA/SIPC. Advisory services offered thru Sterne Agee Investment Advisor Services, Inc. Securities and advisory activities supervised from 4407 Belmont Ave, Youngstown OH 44505, (800) 589-2023.