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Recent Developments in

the Fiduciary Landscape


Consumers Seeking Investment Fiduciaries Contend with Change  

In June 2018, the Dept. of Labor's (DOL's) fiduciary rule on financial advice was struck down in the Court of Appeals.  In effect, the regulatory environment in which investment advisors, financial planners, brokers and insurance agents are required to serve clients has reverted back to the way it was before 2016. 


The Old Rules for Investment Advice Are in Force Once Again

Prior to the DOL's 2016 ruling, the quality of investment advice on retirement assets had in part been dictated by the business model of the advisor providing it.  Brokers and representatives of securities firms were regulated by FINRA (the Financial Industry Regulatory Authority), and operated under a less stringent "suitability standard".  That is, in providing investment advice, this type of financial advisor is only required to:

"... have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer's investment profile."

And insurance agents owe a similarly wishy-washy standard of care to their clients.

On the other hand, registered investment advisors like Five Seasons Financial Planning operate under the Investment Advisers Act of 1940, and have a fairly unambiguous "fiduciary obligation" to act in the best interests of their clients:

"... including an affirmative duty to act with utmost good faith, to make full and fair disclosure of all material facts, and to employ all reasonable care to avoid misleading clients."

While these distinctions in standards of care might seem like splitting hairs to consumers, in practice the lesser "suitability standard" allows brokers, reps and agents to favor their own monetary interests over those of their clients.  The resulting conflict-laden investment advice manifests itself in:

  • sales loads and high management expenses in mutual funds,
  • surrender charges and high administrative expenses in annuities,
  • and the promulgation of proprietary products and high-commission investment vehicles like non-publicly-traded REITS.

The government claims that these practices and products cost investors $17 billion per year in excessive fees, a long way from a mere case of semantics.


The DOL's Rules on Investment Advice on Retirement Accounts Came Up Short

The spring of 2016 witnessed a watershed moment for consumers of financial advice.  On April 6 of that year, the Dept. of Labor (DOL) released new regulations that, in aggregate, imposed a higher standard of care, a fiduciary obligation, on financial advisors who provide investment advice on retirement accounts.

In a nutshell, the Dept. of Labor's new rules stipulate that financial advisors, regardless of business model or type of employer, must place their client's interests before their own when providing investment advice on retirement accounts.  While this would seem to be common sense and is a long-awaited step in the right direction for consumers, the new regulations leave far too much wriggle room for less-than-scrupulous advisors.

First and foremost, it's important to note that the Dept. of Labor's pronouncement only applies to investment advice on the retirement accounts over which it has jurisdiction, for the most part IRA's and 401k's.  It does not apply to taxable investment accounts or to trusts.  Even if you believe that the investments held in your taxable investment account or trust account are destined to pay for your retirement expenses, these accounts do not fall under the new fiduciary standard.

Second, it's telling that on the day the regulations were made public, the related headline in the Wall St. Journal was: "U.S. Softens New Retirement Rule: Scaled-back standard is greeted with relief at many brokerage firms".  The new regulations don't outlaw revenue-sharing arrangements or the sale of financial products into retirement accounts on a commission basis. Both of these business practices are rife with conflicts of interest.  In addition, the disclosure required to be given to clients, especially with respect to fees and expenses, was watered down in the final version of the regulations.  This makes it particularly difficult for consumers to make informed decisions.

Third, and perhaps worst of all, the new regulations allow advisors to sell only a limited lineup of their own company's mutual funds or insurance products even if they are inferior to other products that could be better for the client.  How does that qualify as fiduciary advice, as putting the client's interests first?

For these reasons, it's as important as ever for consumers to work with independent advisors, those unconstrained in their choice of investment vehicles, service providers and retirement solutions, and those who don't receive any compensation from financial companies.  In short, it's as important as ever for consumers to work with a Fee-Only fiduciary.

Even the legal profession is chiming in on the fiduciary debate.  The Public Investors Arbitration Bar Association (PIABA), a group of lawyers who represent investors in securities arbitration and litigation proceedings, has accused the brokerage industry of misleading investors through false advertising.  The lawyers accuse nine brokerage firms of giving the impression in their advertising that they have a fiduciary obligation to put clients' interests first, but when investors' complaints go to arbitration the firms argue they have no fiduciary responsibility to clients.  The brokers singled out by the PIABA include Merrill Lynch, Fidelity Investments, Ameriprise, Wells Fargo, Morgan Stanley and UBS.