On April 6, 2016, the Department of Labor (DOL) released its new fiduciary rule. Discussed and debated for almost a year, the final provisions offer a stricter interpretation of who in the financial industry must serve as a fiduciary and how disclosures must be made to investors. Implementation of the new guidelines is scheduled to take place between April of 2017 and January of 2018.
Up to this point, some players in the investment industry have been allowed to abide by what is referred to as the suitability standard. At its worst, the suitability standard of service permits almost any type of recommendation to be made as long as the advisor does not knowingly harm the client. Put another way, in lieu of making a choice to place a customer’s best interests above their own, financial professionals could comply with the suitability standard by simply relying on their own reasonable belief that the recommendations they made were well-suited to the client’s financial needs, objectives and unique circumstances.
Because their advice only had to be deemed suitable, brokers would reasonably argue their primary responsibility was to the broker-dealer and the products they represented. This left plenty of room for conflict, and allowed many financial professionals to charge undisclosed fees or to favor investments with hidden commissions. The advertisement and promotion of higher-cost/higher-commission funds over equally or better-suited funds that paid less in commission to the seller is a common example of the fruit of the suitability standard. Though these actions may have met the legal definition of suitability, they do not go so far as to be considered in the client’s best interest.
Previously allowed under the suitability standard, such practices will no longer be acceptable under the new fiduciary standard of care. As a result of the DOL’s ruling, the fiduciary standard will shortly become the new paradigm in the advice industry. However, not all segments of the investment advisor population will be equally affected by the change. While many advisors happily conducted business under the less stringent suitability standard, an elective fiduciary standard has also been in existence since the Investment Advisors Act of 1940. This preexisting fiduciary act clearly instructs advisors to place personal interests below those of the client, and identifies particular loyalty and duty of care obligations that further build out the overarching directive: All actions taken by a fiduciary advisor must serve the best interests of their client. Moving forward, advisors who already operated by these standards will make few or no changes in preparation for April 2017. Other advisors will have to rethink the concepts of cost containment, full disclosure and their parameters for positioning a client’s investments, all concepts that were fully addressed all along for each and every client of a fiduciary investor.
While the new fiduciary standard will demand monumental change for a number of financial professionals and institutions, at SYM we already abide by the fiduciary standard and have done so for years. In addition, we applaud the Department of Labor’s action and feel it will lead to greater opportunity for people to achieve their retirement, investment, philanthropic, and legacy goals. If you have questions about the new rule or know someone who could benefit from a relationship with SYM, please don’t hesitate to contact us.