The Fiduciary Standard
February 24th, 2017 | Work to Wealth
This February marks a special anniversary for me professionally, 10 years as a Certified Financial Planner™. You may have heard the news about the financial industry adopting new regulations written by the Department of Labor. If so, this month’s feature article The Fiduciary Standard is a timely piece to help you better understand the new rules and how they affect you. While many companies have been scrambling ever since the new rule was approved, Registered Investment Advisors (RIAs) and Certified Financial Planners™, like my company and myself, have not had to change business operations. For over a decade I have been held to a fiduciary standard and I will continue to put my clients’ best interest first, well into the future.
The Department of Labor is introducing an important new rule regarding retirement plan accounts, which will be phased in during 2017 and fully implemented by 2018. Under this new rule, financial professionals who consult retirement savers will be held to a fiduciary standard. In other words, they will have an ethical and legal obligation to always act in a client’s best interest. 1
Many financial professionals already abide by a fiduciary standard. Thanks to the new rule, even more will. In fact, the fiduciary standard may soon become the “new normal” in the financial services industry.
It has not always been so. Historically, investment professionals have been asked to uphold a suitability standard when making recommendations to their clients. Under the suitability standard, financial products are recommended considering a client’s age, income, net worth, and savings goals. Many in the brokerage industry believe this standard has worked well. 1
The Department of Labor disagrees. In its view, the suitability standard leaves an open door for conflicts of interest to affect client-advisor relationships. In theory, many investments or products could be found suitable for an investor, and the one most recommended could be the one that results in the largest commission for the financial professional offering the advice.1,2
So, which financial services professionals uphold a fiduciary standard and emphasize fee-based or fee-only planning?
Registered Investment Advisers (RIAs) work by a fiduciary standard. They are regulated by the Securities and Exchange Commission and/or state securities authorities, and charge their clients fees for most or all of the services they provide. Both individuals and firms can be RIAs. 2
Certified Financial Planner™ practitioners also uphold a fiduciary standard. These individuals abide by the code of ethics and rules of conduct articulated by the Certified Financial Planner™ Board of Standards in Washington, D.C. They are directed to provide their financial planning services as fiduciaries. 3
Sometimes, the decades-old compensation structure of the financial services industry can impact even those financial professionals serving as fiduciaries. For example, a CFP® practitioner or an SEC-regulated investment adviser may also sell insurance products that provide commissions, and help clients invest in certain brokerage accounts linked to commissions. 1,2,3
In short, the financial services industry is not perfect. The new Department of Labor rule demanding a fiduciary standard from the professionals advising retirement accountholders takes a big step toward remedying some of its imperfections.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – cbsnews.com/news/merrill-lynchs-landmark-move-to-end-broker-commissions/ [10/17/16]
2 – investopedia.com/terms/r/ria.asp [10/25/16]
3 – cfp.net/about-cfp-board/ethics-enforcement [10/25/16]