Anyone searching for investment advice is undoubtedly confronted with many choices of service providers operating under titles such as certified financial planner, financial consultant, registered investment advisor, stockbroker, and insurance agent.
These titles can be confusing because on the surface it is not clear whether these professionals are legally required to have a client’s best interest in mind when making investment recommendations.
Many investors may have read that the Department of Labor (DOL) announced a substantial overhaul in the regulation of financial advice given on retirement savings. Central to this discussion are two terms: fiduciary and suitability. What does it mean for an advisor to operate on a fiduciary standard, and how does this differ from a suitability standard?
THE FIDUCIARY STANDARD
The DOL has described a “fiduciary” as someone who is required to put their clients’ best interest before their own profits. Fiduciaries include registered investment advisors, (like The Retirement Planning Group), and others who hold themselves out to be fiduciaries.
Fiduciaries are required to act impartially and provide advice that is in their clients’ best interest, and in doing so, must act with the care, skill, prudence, and diligence that a prudent person would exercise based on the current circumstances. A fiduciary must avoid misleading statements about fees and must avoid conflicts of interest.
Fiduciaries are typically compensated by payment of a fee rather than a commission. Fiduciaries to retirement plans, plan participants, and IRAs are also prohibited from receiving payments that create conflicts of interest unless they comply with the terms of certain exemptions issued by the DOL.
Probably most importantly, clients can expect that a fiduciary will act with transparency and avoid prohibited conflicts of interest. For example, given two comparable investment choices for a client, a fiduciary should typically recommend an option with lower management fees.
Fiduciaries are personally liable for breaches of their fiduciary duties. For example, if there is a loss caused by a breach of fiduciary duty, the fiduciary must make the plan or IRA whole by restoring any losses caused by the breach and restoring to the plan or IRA any profits made through the use of plan or IRA assets. Civil actions to obtain appropriate relief for a breach of fiduciary duty may be brought by a participant, beneficiary, fiduciary, or the US Secretary of Labor, and the fiduciary may be subject to excise tax penalties.
THE SUITABILITY STANDARD
Historically, representatives of a broker-dealer are required under the securities laws to judge the suitability of a product for a prospective investor, based primarily on that person’s financial goals, income, and age. Unless agreed otherwise, under this standard the rules do not legally require a recommendation of the most cost-effective product, a disclosure regarding conflicts associated with the investment, or disclosure of the compensation received when making that recommendation. Under the new DOL rule, it may mean that common forms of broker compensation, such as commissions and revenue sharing, will be restricted.
WHAT DOES ALL THIS MEAN AT THE RETIREMENT PLANNING GROUP?
With all the attention around Fiduciary and upcoming changes that will take place, here at The Retirement Planning Group it’s business as usual. You see, since we started The Retirement Planning Group in 2004, we’ve been acting as a fiduciary and putting our client’s interest above and beyond anything else since day one.