Embracing a Fiduciary Standard
The Department of Labor’s so-called fiduciary rule resurfaced in the news headlines a few weeks ago when the Trump administration delayed its implementation (which was set for April 10th) and indicated its further intent to completely rescind the rule. The fiduciary rule holds brokers and financial advisors working with tax-advantaged retirement accounts to a fiduciary standard rather than the current suitability standard. A fiduciary standard holds that investment advice must be in the client’s best interest while the suitability standard merely requires advice that is suitable to the client’s interest. The distinction is seemingly minor but incredibly important.
A suitability standard does not require investment advisors to disclose potential conflicts of interest in their investment recommendations – such as high costs or commissions incurred by the client. Just about any investment advice can be justified as being suitable for a client’s needs, while a best interest standard requires careful examination and client-specific recommendations. A fiduciary standard is so clearly in the best interest of the investing public that it’s hard to fathom such widespread and strong resistance to its application by so many in the financial industry. When the DOL announced the final regulations for the fiduciary rule last year, most of the public were shocked to find out that investment advisors weren’t already required to act in their best interests.
Large financial institutions, brokerage firms and insurance companies argue that implementation of the fiduciary rule would actually harm Main Street (and its smaller investors) because it would limit their access to financial advice. These institutions’ business models are not equipped to serve smaller clients with a best interest standard so they allege these investors will simply be ignored or left to invest their retirement assets on their own. It’s a ridiculous argument on two main fronts. First, there are plenty of financial advisors and investment managers operating under the fiduciary standard (and have been for years) that are ready, willing and able to serve any investor demographic. Technology and unprecedented access to smart, low-cost diversified portfolios provides a logical platform for retirement portfolios of any size. Second, rather than fight the rule, these large institutions could instead simply adapt their business model and client services to comply with this client-centric standard of care. Many have already embraced the rule when it was announced last year and have laid the foundation for future compliance.
The only real problem with the fiduciary rule is that it doesn’t extend the best interest standard far enough. The rule only covers tax-deferred retirement accounts (401(k)s, IRAs, etc.). The fiduciary standard should absolutely apply to all assets owned by individual investors. Why should financial advisors only be required to act in their client’s best interest with their retirement assets but not money they are saving for education, a new home or future travel? Individual investors engage financial advisors seeking help and direction in securing their life’s most important goals. To not place the client’s best interest at the foundation for investment advice and recommendations runs contrary to their entire intention for seeking guidance in the first place.
Regardless of how the Trump administration proceeds with this rule, an important line has been drawn with respect to how financial advisors are serving their clients. They are either serving their client’s best interest or they are not. As a Registered Investment Advisor, The Johnston Group embraces the fiduciary standard which affirms our Wealthcare360™ philosophy of placing each client’s unique life situation and goals at the center of the planning process. All advisors and investment managers should be held to this standard. Whether the fiduciary rule ever becomes law, its principle is well-established and all individual investors should seek fiduciaries when looking for financial advice.