Fiduciary Rule: What You Need to Know

As of June 9th, 2017, the Department of Labor's fiduciary rule, also known as the conflict-of-interest rule, has partially taken effect.  The new rule has the greatest effect on financial advisors who are registered brokers.  How does the fiduciary rule impact you?  What do you need to know?

A Quick History

Following the path of this regulation has been volatile and confusing, even for industry insiders, so I suspect most consumers do not understand what the fiduciary rule is all about. The rule was released on April 6, 2016, nearly six years after it was proposed by the Obama administration.  There have been lawsuits filed against the rule, and President Trump signed an executive order to delay the rule's implementation.  Last Thursday, the House of Representatives voted to pass the Financial Choice Act – a bill that would strip back certain Dodd-Frank financial reform regulations that could effectively scrap the fiduciary rule.  And just hours before voting on the Choice Act, Reps. Phil Roe, R-Tenn., and Peter Roskam, R-Ill., introduced the Affordable Retirement Advice for Savers Act, which also would overturn the fiduciary rule.  While its future still remains uncertain, the fiduciary rule has officially been implemented by new Labor Secretary Alexander Acosta.

What's a Fiduciary?

Fiduciary is a term for advisors who put their clients' interests ahead of their own.  If you work with a fiduciary, it means that your advisor is not selling commissioned products and is required by law to put your interests first.  

If you thought your financial advisor was already required to do this, you're not alone.  Nearly half of Americans (46%) believe that all financial advisors are required to put clients's interests ahead of their own.  Let's take a look at what this new rule means. 

What The Fiduciary Rule Says

The two provisions that matter to investors are:

  1. An expanded definition of the fiduciary

    The bar has been raised on the level of advice you'll be getting for your retirement investments.*  If you're not familiar with Suitability vs. Fiduciary, brokers and dually registered advisors (those associated with a broker-dealer) could previously have recommended financial products not completely in your best interest due to higher fees or commissions.

    Now, when it comes to your retirement accounts, all financial advisors, including brokers, insurance agents, and wealth managers are required to act as a fiduciary, meaning they must act in the best interests of their clients.  This means that brokers are required to be more transparent about fees and recommend retirement products in your best interests.

    * The fiduciary rule only affects your retirement accounts.  But, this begs the question, shouldn't your non-retirement investments also deserve this higher standard?

  2. Impartial conduct standards

    The significant requirement of the rule is for advisory firms to develop, implement, and follow impartial conduct standards.  This means that financial institutions and their advisors are required to:

    1. Comply with the best interest standard that requires prudence, individualization, and conformity with the fiduciary duty of loyalty.
    2. Charge only reasonable compensation that is not excessive relative to the value of what is being delivered and based upon the facts and circumstances involved.
    3. Not make misleading statements about investment transactions, compensation and material conflicts of interest, and other matters relevant to decision-making.
Despite objections by many financial service companies, most consumers welcome the above requirements.

Why You Might Receive a New Service Agreement

While the fiduciary rule has been implemented, the industry remains in a transition period as the rule will not be enforced until January 2018.  Here are a couple things to look for.

If your advisor is currently compensated by commissions, you will likely be presented with a disclosure agreement called a Best Interest Contract Exemption (BICE).  Since commissioned products may have been recommended to you under the Suitability rule, and such products possibly not sold in your best interest, review any and all new agreements carefully so that you understand the implications of what you are signing.

For plan sponsors of a retirement plan, the new rule could affect their record keepers, specifically distinguishing between non-fiduciary education and fiduciary advice.  Therefore, some service providers might be revising or amending service contracts.

Whether you are an individual or a company, the key is read the fine print.  You must understand what you are receiving and what you are agreeing to.  There is no doubt that the regulation is full of complexities but this is not good reason for consumers to not pay attention.  

A Fiduciary From the Start

As a registered investment advisor (not a broker), Runnymede has adhered to the fiduciary standard since its doors opened in 1993.  We believe this model of disclosure and transparency is in our clients' best interests.  In our view, you deserve to have your needs put first and the strategies and investment products we recommend should align per those needs.  Because Runnymede already acts as a fiduciary, the new fiduciary rule affects us minimally. 

Here’s how we protect you and your investments:
  • We always put your needs first. We are committed to the highest professional and personal standards, and this commitment remains as strong as ever.  Our sole focus is on your financial needs and goals and how we can best help you pursue them.

  • We always act in your best interests. We are committed to putting your needs and goals before those of our firm. We strive to avoid conflicts of interest and never sell commissioned products.  We provide a high level of transparency around fees or expenses associated with your accounts, so that you always know what you own and what you’re paying, so there are never any surprises.

  • We are an independent and objective resource. As an independent firm, we provide you with objective, unbiased advice based solely on your needs and goals.  We provide guidance that is objective and unencumbered by potential conflicts of interest.  Our only interest is that your financial objectives are met.

Ask for Help

Consumers cannot relax and stop advocating for themselves.  If you've received a new disclosure agreement (Best Interest Contract Exemption) or amended service agreement and need help understanding it, we can help.  As an independent fiduciary advisor, Runnymede has experienced an increase in questions from individuals and businesses trying to better understand the fiduciary rule.  We are available as an objective resource.

annuity tipsDo you understand the fiduciary rule and how it impacts your advisor? Will you be making any changes?

"fiduciary" by mikecohen1872 is licensed under CC BY 2.0

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About the Author: Andrew Wang

Andrew Wang


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