The phrase “DOL Fiduciary Rule” may sound sleep-inducing, but its logic should be a wake-up call for anyone interested in protecting their retirement savings. This rule, proposed by the Department of Labor to go into effect this April, aims at protecting people’s retirements by requiring financial professionals to put their clients’ financial interests above their own and be far more transparent about how much money they are making off the investments they recommend. But this rule has been the subject of a concerted attack by interested parties, and may end up never seeing the light of day.
As surprising as it sounds, the majority of financial professionals are not legally required — i.e., have no “fiduciary” obligation — to put their clients’ interests ahead of theirs. These non-fiduciaries have chosen a standard of client care that allows such firms and their representatives to sell their clients virtually anything they want, as long as the “products” they sell can be considered “suitable” to their clients’ needs and objectives.
What’s suitable however is not necessarily cheap, and the salesperson may well recommend something that is expensive, but profitable to him/her, when cheaper alternatives exist. This “suitability” standard is shared by over 635,000 employees of “Broker-Dealer” firms like Morgan Stanley, UBS, Bank of America Merrill Lynch, Baird, Raymond James, and many others.
What many investors don’t know is that there is already a segment, albeit small (about 12,000), of financial professionals who have chosen a “fiduciary” relationship with clients — meaning they have chosen to put their clients’ interest ahead of their own, without exceptions. These professionals are “Investment Advisor Representatives” who work for Registered Investment Advisor firms (RIAs), and are mandated by law to act in a fiduciary capacity for clients. The DOL Rule’s goal is to make all financial professionals adhere to the same standards as RIAs when they advise retirement accounts.
The DOL does not mince words about the necessity for the new rule: “Non-fiduciaries may give imprudent and disloyal advice; steer plans and IRA owners to investments based on their own, rather than their customers’ financial interests; and act on conflicts of interest in ways that would be prohibited if the same persons were fiduciaries.”
Who could argue that more transparent pricing of transactions and instruments is not a good thing, or that professionals who invest their clients’ savings should not act in the best interest of those clients?
Not surprisingly, the non-fiduciary professionals within the Broker-Dealer and Insurance industries do. Up to now, there’s been no braking system or cautionary yellow light to compel non-fiduciary professionals to act in their clients’ best interests above their own. The DOL intends to change that and therefore those who oppose the rule use words like “regulatory burden,” “government overreach,” and “frivolous lawsuits,” to elicit support for their position.
The DOL doesn’t believe investors understand the distinction between fiduciaries and non-fiduciaries well enough and they want to close the loop in order to protect ordinary investors, stating: “Disclosure alone has proven ineffective to mitigate conflicts in advice. Extensive research has demonstrated that most investors have little understanding of their advisers’ conflicts of interest, and little awareness of what they are paying via indirect channels for the conflicted advice.”
The DOL rule has been under tremendous industry pressure to be delayed or repealed, and the Federal government recently announced a review of the rule which may well end up killing it. Regardless of whether the DOL Rule survives, individuals and families can take an incredibly easy step right now to protect all their investments – not just their retirement accounts – by simply asking their financial professionals a direct question: are you and your firm, by law, subject to the fiduciary rule?
Your financial future should never come second to a financial professional’s profitability. Only a clear, firm, and unequivocal “yes” will mean that your financial interests are being put first.by