the New Federal Fiduciary Rule Means to
April, the U.S. Department of Labor (DOL)
made headlines with its final rule covering
conflicts of interest among investment
advisers. Media coverage focused on the
difference between a ""fiduciary"
standard andi a "suitability standard.
Financial advisors and investment firms
have been debating this issue-often heatedly-for
years, and the DOL action probably will
bring about changes within the industry.
new rules also have a message for investors,
especially those who rely upon an advisor.
This lesson may not be astounding but
it's worth keeping in mind: You should
know what investment advice is costing
and whether you're getting your money's
Investment advisors who are registered
with the SEC are considered fiduciaries:
They have an obligation to act in a client's
best interest. Alternatively, registered
representatives associated with a securities
brokerage firm are required to make investment
recommendations that are suitable for
a particular client, given the client's
circumstances. (Registered investment
advisors are fiduciaries under the Investment
Advisors Act of 1940 but not under ERISA,
the federal law covering retirement plans;
ERISA is the DOL's responsibility, so
that agency issued the rule on retirement
issuing its final rule in April, the DOL
came down firmly in favor of the fiduciary
standard, stating that "persons who
provide investment advice or recommendations
for a fee or other compensation with respect
to assets of a plan or IRA" will
be treated "as fiduciaries in a wider
array of advice relationships."
Investors should keep in mind that the
DOL rule covers retirement advice, not
all investments. Therefore, this regulation
applies to advisors' recommendations for
IRAs, 401(k)s, and other retirement accounts.
When Wendy Jones seeks advice on how to
invest in a regular (non-retirement) account,
the DOL rule won't apply, at least not
directly. Advisors who adhere to a fiduciary
standard for retirement advice may well
follow the same approach for other client
the DOL clearly associates investors'
best interests with low costs. The DOL
repeatedly has mentioned "backdoor
payments" and "hidden fees"
as factors that harm American workers
and their families. Lowering fees would
boost returns, the DOL asserts.
Some observers believe that the federal
support of a fiduciary standard will result
in more advisor support of passive investment
strategies and less emphasis on active
management. Also, sales commissions may
yield ground to fee-based advisory arrangements.
of those assertions may come to pass,
but both trends are already well under
way. Passive investing generally means
holding funds that track a market index,
such as the S&P 500. Such funds typically
have relatively low costs, as there is
no need to pay for research into security
selection, and relatively low tax bills,
because of infrequent trading.
mutual funds have been popular for some
time, as finding fund managers who consistently
outperform the indexes has proven to be
challenging. In recent years, exchange-traded
funds (ETFs) have taken market share from
mutual funds; most ETFs track a specific
market index. Thus, many advisors and
clients have been moving towards such
low-cost, tax-efficient approaches.
fee-based investment arrangements also
have been on the rise. Advocates assert
that paying, say, an asset management
fee puts a client "on the same side
of the table" as an advisor, reducing
conflicts of interest. If a client's investment
assets grow through superior returns,
so will the advisor's management fee.
Given this background, what can you take
away from the DOL's proposal? First off,
don't focus solely on terminology. Whether
you're getting the "best" investment
or a "suitable" investment for
your needs, you will have to pay the advisor
in some manner. Therefore, you should
know how much you're actually paying,
so read all contracts, engagement letters,
and other documents carefully to find
out the true cost.
realize that low costs aren't everything.
Ascertain what value you're getting for
what you pay. Is your advisor providing
only investment advice? If so, what results
have you received? Many financial professionals
go beyond investments to insurance planning,
education planning, estate planning, and
other areas of wealth management. If you
have such an advisor, does the total package
provided to you justify the total amount
of your outlays? If you are not comfortable
with the answers, you may have to seek
someone else to help you handle your financial
November 2016 AICPA Client Bulletin