The rule that was designed to protect retirement investors was years in the making. Here’s what it aims to do, and the effects if it ever (or never) gets implemented.
Although not making many headlines outside of the financial industry, President Trump has delayed the Department of Labor’s fiduciary rule from being implemented. The rule, which gives retirement investors a guarantee that their financial advisers are looking out for them, was set to go into effect on April 10, but now it’s in limbo.
In the meantime, you may be wondering: Why does there need to be a law ensuring that financial professionals act in the best interests of their clients? Are there really that many advisers acting only for their own personal gain that the Department of Labor had to create a ruling to stop these poor practices?
While there is abuse and fraud by some in the industry, just like there is in any other industry, there is more to the rule than simply stopping excessive fees and unchecked greed. Making fees transparent, removing conflicts of interest and requiring financial professionals to adhere to certain standards are the basic ideas behind the ruling.
At Telemus, the ruling will have a very limited effect on how we do business. For us, and other registered investment advisers (RIAs) already operating according to the fiduciary standard, there will be some additional costs and time associated with adhering to the revised compliance standards. However, the effect will be limited, because we already comply with most of the rule’s requirements.
The Basic Idea Behind the Fiduciary Rule
The rule only applies to retirement accounts and qualified plans — accounts where money is invested on a pretax basis, such as 401(k)s, 403(b)s and IRAs. The bottom line is that the fiduciary rule is seeking to accomplish three key objectives:
- Eliminate conflicts of interest. When an adviser is receiving certain types of “additional compensation” in connection with the products they are advising their clients to purchase, there is a risk that the client recommendation was influenced by receipt of the “additional compensation” rather than what was in the best interests of the client.
- Require clear disclosure and transparency of fees. This is simple in that any fees must be disclosed in the dollar amount to their clients. This includes an hourly billing arrangement if a client is seeking advice from their adviser without making any investment changes.
- Require adviser adherence to a fiduciary standard vs. a suitability standard. The fiduciary standard means that advice is required to be in the client’s best interests, whereas the suitability standard does not. That does not mean they are giving misleading advice, but rather that the products offered are suitable for the clients’ needs. These might be proprietary products of the adviser’s company or platform which have higher fees and expenses than what is otherwise available in the marketplace.
Getting Behind the Fiduciary Rule
The above points are all things RIAs, and especially Telemus, are already doing.
The business model of running a firm as a fiduciary offers many benefits for increased customer service and investment options. Retirement is a complicated, long-term strategy, and even the smallest fees can be a real savings loss over time. Using the best plans with the lowest fees, disclosing those fees, and recommending the appropriate investments under fiduciary guidelines will naturally lead to a better outcome potential for the client.
There will definitely be increased costs for regulatory compliance that fiduciaries will have to take on, but operations will remain relatively the same. Although many companies have updated their operations based on the fiduciary rule, the uncertainty behind the rule’s implementation has meant there are also many companies lacking the required changes to comply.
One additional way that Telemus and other companies will manage the fiduciary rule is by hiring a compliance officer who makes sure the firm is adhering to all of the rules. In our case, Telemus has a seasoned chief compliance officer and general counsel working in-house to make sure we are always in compliance. This is in contrast to many in the industry who are working off a traditional brokerage platform under suitability standards and not adhering to the proposed fiduciary standards.
What it Means for the Investor
Along with the ability for abuse among retirement plans, there is also a low barrier for entry for advisers. Advisers need limited credentials and education to sell retirement plan solutions, and there are limited controls on people who do get into the business. In addition, the way advice is being delivered along with the products is outdated. The purpose of the fiduciary rule is to expose the excessive investment expenses many companies incur that are unnecessary. No longer will the excuse be, “This is how we’ve always done it.”
For the investor, if the rule is implemented, they will be more informed and not subject to excessive fees in their underlying investments. The average investor would be able take comfort in knowing their adviser must look out for their best retirement interests. With more transparency, the costs related to investments for the participants should go down.
But all that is on hold, after the recent actions to delay the rule. Until that changes, things will remain as-is. Lower costs of compliance will mean smaller shops can be in business and small groups of individuals looking for advice will find more options. The question, however, is quality. Will the advice and the funds be as good with commission structures and lower barriers of entry in place? While the answer to that question for many plan sponsors will be unknown, companies using advisers already adhering to fiduciary standards should have an increased level of comfort.
As a partner at Telemus, Josh Levine works with individual members on comprehensive financial life management issues. He also assists business owners with evaluating their qualified retirement options such as 401(k), profit sharing and cash balance plans.
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