By now you have probably heard a little bit about a new fiduciary rule that has started to take affect as of June 9th. Political and market talking heads have been discussing it for more than a year now. There are always two sides to any story so let’s clear up some of the conversation to help everyone understand just what it will mean for you.
What is a Fiduciary?
What is a fiduciary to begin with? In simple terms, it is someone who takes a position of trust with one or more people. In this case, it is someone with whom you trust to watch over your assets. You may be thinking to yourself, “well, that means any financial professional is a fiduciary, right?” Not necessarily. Prior to the change in regulation, most financial professionals were only held to a suitability standard. They were required to make sure an investment recommendation was “suitable” for you, normally based on a risk tolerance questionnaire or something along those lines. While this can make sense, it didn’t necessarily keep a financial professional from selling you an investment that earned them a higher commission. A fiduciary on the other hand, is required to put the best interest of the client ahead of their own, while factoring in things like risk tolerance, time horizon, and fees to make sure that an investment is in the best interest of the client.
The new rule that is being rolled out states that anyone advising on retirement assets is required to now follow the legal and ethical standards of a fiduciary advisor. The purpose of the change is to reduce the conflicts of interest for advisors working with retirement assets, protecting clients from being overcharged or put into bad investments that could negatively impact their retirement savings. One example would be an advisor that earns their money based on commissioned trades. That advisor then has an incentive to change investments more frequently than may be needed for a client, earning them a higher commission.
The overall idea behind the change in rules is good. Clients are trusting advisors to help them make the best choices when managing their retirement assets. We are looked to as a knowledgeable and trusted partner in their financial lives. It makes sense that advisors put the best interest of their clients first. It should help provide transparency in the way clients are charged and help create confidence that they are getting the best advice for their personal situation.
As with any change in regulation, this rule change is not without some downside. One being it is going to cost firms a significant amount of money to maintain compliance. You may think that’s not such a bad thing because they make so much money anyway, what’s a little extra of their revenues, but that extra cost could do some harm. Think about it in terms of shipping. Say a company delivers product to big and small stores all over the country. Now, the price of gas has gone up meaning it will cost them more to ship their product out. They could raise the price of their product to offset their increased gas cost, which could put them out of competition with their competitors, or they could quit shipping to smaller stores and only focus on their large stores that sell the most product. Most likely, they will cut out the smaller stores that aren’t as cost effective for them to ship to. In our case, this could mean that smaller clients could lose access to professional advisors. Companies may say it no longer makes sense for them to work with people that have less than $100,000 for example, because the cost associated per client is more than what they earn on those smaller accounts. This idea is backed up by a U.S. Chamber of Commerce report that states service fees in retirement accounts could rise as much as 200%, up to 7 million individuals may lose access to investment advice, and 70% of insurance service providers already have or are considering exiting the market for small IRAs and small plans.
What does it mean for you?
All things being equal, it should mean that you get better advice tailored to your personal needs, without the risk of being taken advantage of in terms of commissions and fees. It will open more conversation between clients and advisors which is always a good thing. On the downside, it could change your relationship with your current advisor. It will most likely mean a little more paperwork coming your way when working with your advisor or it could prompt a change all together.
The idea of having more advisors working as fiduciaries is a good idea. I feel its is our job as advisors to make sure we are doing the best thing for clients. It’s a significant change in the industry, meant to do a lot of good. We all know that regulations always take time to sort themselves out to be the most effective for everyone, but this is a move towards making the industry better for clients. It will cause some headaches on both sides of the partnership between clients and advisors. As Teddy Roosevelt once said, “Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty.” There is plenty more to talk about in terms of the Fiduciary Rule change and Indy Wealth Solutions is here to help answer those questions.