By Dean Stange, J.D., CFP® | Principal, Senior Financial Advisor
The Department of Labor (DOL) recently issued new regulations enacting a fiduciary rule for retirement plan advice, in an effort to end some of the abuses that unfortunately are widespread in retirement plans. We covered the background and main terms of the rule after it was released on April 6 (you can read our take here). Due to this new regulation, the term “fiduciary” has received a lot of attention in the news and on financial talk shows lately. Just last weekend, Last Week Tonight with John Oliver dedicated an entire segment to the fiduciary standard, proving that the term has officially made its way into the mainstream.
Here is the big-picture story behind the DOL’s regulation (and the reason this has received so much attention suddenly): for years, there has been a battle brewing in the financial services industry over the fiduciary standard. The DOL’s fiduciary rule is just the latest clash in a much larger financial-services civil war.
What Is a Fiduciary, Anyway?
Let’s back up: there are significant differences in how traditional Wall Street brokerage firms and registered investment advisors (RIAs) are regulated under current law. RIAs, like our firm, are regulated by the Investment Advisers Act of 1940; the terms of this act impose a fiduciary duty on all RIAs, but not most brokerage firms. By definition, fiduciary advisors have “an affirmative duty of utmost good faith to act solely in the best interests of their clients, and to make full and fair disclosure of all material facts,” particularly with respect to actual or potential conflicts of interest. Above all, a fiduciary advisor must put his or her clients’ interests ahead of their own interests and ahead of their firm’s interests.1
By comparison, brokerage and insurance firms are held to a lower “suitability standard.” This means that brokers, insurance sales representatives and advisors operating under this standard are merely required to offer investments that are suitable for their clients. As one Forbes writer put it, this standard “doesn’t require brokers to find the best products, only ones that are ostensibly suitable for you. If an underwhelming house-brand security lines up with the vague outlines of what is considered suitable, they can still push it, even if it costs more to own or underperforms peer securities.”2
Continue reading Why You Should Demand a Fiduciary Standard