This past April the Department of Labor issued its “final” version of an important rule. The rule goes into effect in April next year, and requires financial advisors to follow the “fiduciary standard” regarding the retirement accounts their clients hold with them. The financial institutions say that this will lead advisors to unceremoniously dump thousands of clients.
Quick reminder: “fiduciary standard” means the advisor owes the client the duties of good faith and trust. It’s the highest legal duty of one party to another, and calls for being bound ethically to act in the client’s best interests.
These clients will be dumped by their advisors because the advisors and their broker dealers are compensated by high plan fees or commissionable products, and the new rule will lead to increased compliance scrutiny and expenses for them.
Under this compensation structure, the clients that have smaller amounts in their IRAs become costlier to service. So they’ll be dumped into a boiler room phone bank advisory center. Yes. Thank you for the business and trust you’ve placed with me all these years, I love you for it, but…It’s not you, it’s me.
This is the baseline argument the financial institutions have made as they’ve gone into battle with the DOL on this not-so-new rule. That thousands or millions of consumers will be left out in the cold without advice because this over-regulation imposes unjust expense on the institutions.
The fact that compliance with the rule will come at a significant expense to the institutions and advisors, is undeniable. But the simple fact is this transition needs to happen. The model the industry has followed—the suitability standard—is fundamentally flawed and everyone knows it.
Another reminder: We’ve talked about the “suitability standard” in this blog before. Refresh your memory here.
Laugh if you will, but when you boil it down, our entire economic and legal framework as a culture is based on trust and faith that each party to a transaction or business relationship is not going to lie or fail to hold up their end of the bargain. When confidence in that arrangement deteriorates, business and economic activity grinds to a halt in Global Financial Crisis style.
The financial services industry has done just about everything it can to tilt the field in their favor while rationalizing the reasons “they need to” and smiling to our faces and shaking our hands. I for one am embracing the rule the DOL has put forth because as I see it, my business depends on it. After all, our clients have entrusted us with their financial livelihood.
Full and fair disclosure: our embrace of this model is not entirely altruistic. What better way to distinguish ourselves as unique and valuable in a very crowded and confusing market place than to put our money where our mouths are and placing our client’s financial interests before our own? I can’t think of one. We need to be compensated, of course. I have one child in college, another soon to be, and it costs a lot of money to run this business. But I once had a manager who’d say, and I’m a firm believer in the idea that, if we do the right things for the right reasons, the rest will take care of itself.
When it comes to your financial future, you deserve to work with someone that will put your financial interests before their own. This rule will force the big companies to do so, and this will create competition for us. They’ll only go kicking and screaming though, and it will take years for them to come even close to providing the level of transparency and fair dealing we do, if ever.
So if you rolled over this morning and your advisor said he/she doesn’t love you anymore and it’s not you it’s me, give us a call. We’re feeling the fiduciary love.