New Fiduciary Ruling Creates More Confusion for Investors

Last week, the Department of Labor (DOL) issued a new ruling which expands the definition of the term “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA).

If you’re not familiar with the word fiduciary and how it fits into the world of financial advice, the shorthand definition is that a fiduciary is someone who is required to act in someone else’s best interest.

Although on the surface, it would seem obvious that more consumers receiving more advice that is actually in their best interest would be a good thing, I have some significant concerns with the new ruling.

More Laws, More Confusion

At the top of my list is that I believe the law is likely to create more confusion, not less, among investors who are seeking professional advice. Likewise, I think that many investors will presume that this new fiduciary ruling will put an end to poor or conflicted advice, when in fact that is far from the truth.

Potentially worst of all is that the ruling comes at a time when I see real progress already being made towards educating consumers about the power of things like index funds, low cost investing, and action-oriented financial planning.

Although the DOL may believe that the expanded fiduciary requirements will accelerate this trend, there is little to nothing in the new law that suggests it actually will.

A Commitment to Doing What is Right

To be clear, as a Registered Investment Advisor (RIA), my firm has consistently adhered to a fiduciary standard since the company’s inception. This commitment is defined in the Wealth Engineers Code of Ethics, in each client’s written services agreement, and in the disclosure brochure that is filed with the regulatory authorities and provided to every client.

More importantly, however, putting clients first is simply the right thing to do. I don’t need a fancy word like “fiduciary” to tell me that. I know that my clients have placed great trust in me to provide them with honest advice and to serve as a steward for their finances. That responsibility is something I take very seriously. No law or compliance requirement will change that.

Unfortunately, the new law takes a word that should have a simple and universal meaning and further muddies the water with a series of “ifs, ands, or buts.”

Part-Time Fiduciaries

For example, under the DOL’s new requirements, an advisor who is a registered representative of a broker dealer will now be required to act as a fiduciary when providing advice or recommendations for an investor’s individual retirement account (IRA). So far, so good (at least it would seem).

However, that very same advisor has no fiduciary obligation to that very same client for any of their non-retirement accounts.

This effectively turns thousands of broker-dealer reps into “part-time fiduciaries” who will now split their time between commissioned sales person and fiduciary advisor, often to the same client.

Even worse, the definition of fiduciary in the ruling still allows broker-dealer rep to sell proprietary products and expensive annuities to the client in their IRA. In what world that meets the definition of fiduciary I’m not sure.

My Advisor is a Fiduciary (Except When He’s Not)

Unfortunately, this is just the most recent instance of broker-dealer reps being granted the authority to confuse clients by wearing multiple hats.

The other recent example is broker-dealer reps who are also CFP® Professionals.

While the CFP Board of Standards states affirmatively that “CFP® professionals are held to strict ethical standards to ensure financial planning recommendations are in your best interest,” that doesn’t tell the whole story.

That’s because the CFP Board only requires broker-dealer reps to act in the client’s best interest specifically when delivering financial planning advice. At all other times, a representative has no such obligation.

Confused yet?

Potentially the most frustrating part for a consumer is not knowing when a broker representative is acting in their best interest and when they are not.

Does the advisor sound an alarm and flash some lights to let the client know?

Does the advisor swap their green tie for a red one?

How to Find a Full-Time Fiduciary

Thankfully, what hasn’t changed as a result of the new “fiduciary standard” is that there is still a clear way for consumers to obtain professional advice that puts their interests first all of the time: When selecting a financial professional, choose a fee-only Registered Investment Advisor (RIA).

Even better, ask them to show you in writing that they specifically adhere to a fiduciary standard when delivering investment and financial planning advice.

While nothing can guarantee a successful relationship, working with a fee-only RIA puts you on much firmer ground.

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