The recently passed Department of Labor rule commonly referred to as the “Fiduciary Rule” represents a fundamental shift in the way the financial services industry operates with respect to the provision of investment advice. In essence, the rule, which is set to take effect in April 2017, will now require brokers, advisers and other financial professionals to act in the best interests of the client (acting with fiduciary duty) when advising and making recommendations on qualified retirement accounts such as IRAs, IRA Rollovers and 401k accounts. The idea is that this regulation will stop financial professionals from putting their own interests in earning high commissions and fees over their clients’ interests in obtaining the best investments at the lowest prices.
A “fiduciary” is defined as a person who has the power and obligation to act for another under circumstances which require total trust, good faith and honesty. While this may seem like common sense, most clients will be surprised to learn that, until now, many brokerage firms and financial professionals were held to a much less stringent “suitability” standard when providing investment advice. Prior to the adoption of the rule, so long as an investment or financial product being recommended was “suitable” for the client, it was allowed—even if there was an inherent conflict of interest in recommending the investment, such as excessive commissions, or fees, or if there was a better option available based on the client’s unique needs and objectives. As a result, many investors were sold mediocre investments and other financial products that may not have been in their best interest or met their particular investment needs. In many cases, these investment products paid the financial professional who recommended or sold the product at a higher fee or commission than another investment alternatives that may ultimately have been a better fit for the client.
Although the Fiduciary Rule will not ban commissions and fees on the sale of investment products or advice, its practical impact will cause many in the financial services industry to: (a) adjust the way in which they are paid by charging a flat fee or a fee based on a percentage of the assets they manage, or (b) provide clients with detailed disclosures about commissions, fees and conflicts of interest, including a pledge that the adviser will act in the client’s best interest and only earn “reasonable” compensation.
Even though the rule has passed, it is still under attack by many in the industry who claim that its implementation will result in negative consequences for clients over the long term. Opponents point to increased compliance costs, which may result in investors with smaller portfolios being turned away by some brokerage firms since the fees generated from these accounts won’t offset the cost of ongoing compliance. Proponents of the rule argue that the long-term benefits to clients far outweigh any potential increase in compliance costs or limitation on the pool of investment professionals available to smaller investors since clients can now be sure that the investment advice they receive for their retirement accounts will be based on what is in their best interests, and not the best interests of their adviser.
The significance of the new DOL rule will be to begin to lay the groundwork for a uniform standard for the provision of investment advice across the financial services industry. Although the rule only applies to qualified retirement plans and not after-tax investment accounts, we see its adoption and implementation as a positive for the investment management industry and clients alike. As an SEC-Registered Investment Adviser, Bridges Investment Management has always held itself to a fiduciary standard. The best interest of our clients is now, and has always been, at the heart of what we do. We take pride in the trust we have earned with our clients by providing objective and transparent investment management services, and we look forward to building upon those trusted relationships in the years to come.
Read more articles from our July 2016 newsletter here.