On March 15, 2018, the Court of Appeals for the Fifth Circuit Court overturned a lower court decision that would have advanced a fiduciary standard for investment advice that the Department of Labor’s introduced in 2016. The appeals court decision invalidates the fiduciary rule requiring investment brokers and financial advisors to act as “fiduciaries” when managing clients’ 401(k), IRAs, pensions and other retirement assets and to put the interests of those clients ahead of their own financial gain. As a result, some financial professionals will continue to be held to a lower “suitability” standard that permits them to recommend and sell to investors products that could potentially be similar, less costly and sometimes more beneficial to an investor than those that yield a higher commission for the broker. According to the DOL, this form of commission-based compensation may present a conflict of interest that could put individuals’ and their retirement savings at risk.
Because many estate and financial planners already adhere to the fiduciary standard contained in the Employee Retirement Income Security Act of 1974 (ERISA), investors should not have a difficult time finding advisors who avoid conflicts of interest and conduct their businesses transparently and in the best interests of their clients. These advisors are registered with the Securities and Exchange Commission and can be easily investigated by consumers online at website managed by the SEC and the Financial Industry Regulatory Authority (FINRA).
However, the responsibility to identify and select to work with qualified fiduciaries rests squarely with consumers. Ask questions. Is the advisor a fiduciary or does he or she recommend products and services that are merely “suitable”? How do the recommended products fit into an individual’s comprehensive estate plan? How is the advisor compensated and what costs or fees should the investor expect to incur? What safeguards does the advisory firm have in place to help preserve clients’ assets and prevent conflicts of interest?
Before making any decisions, investors should receive, in writing, detailed summaries of all of the fees and commissions advisors charge, how those amounts are calculated and when, if at all, they may increase or decrease.
Brokers and financial advisors work under different fee structures. For example, an insurance broker may charge an investor a commission on the sale of insurance products that he or she deems suitable for the investor, even when a lower cost option is available.
Conversely, advisors who manage the entirety of clients’ comprehensive estate plans, including investments, retirement savings and insurance products, and who charge each client a fee based on the percentage of total assets managed by the advisory firm, do have a requirement to meet the fiduciary standard.
Again, without the fiduciary rule in place, consumers must do the legwork to understand how a potential advisor is compensated, whether or not the advisor’s fees are considered reasonable and whether or not the advisor or his or her firm has a conflict of interest with the investments he or she recommends.
The future of the fiduciary rule is currently in a holding pattern as we wait to see if the Department of Labor will request a rehearing or take its case forward to the Supreme Court. For the time being, the original fiduciary advice regulations issued in 1975 remain in effect. Under this standard, an investment advice fiduciary is a person who renders ongoing, individualized investment advice “pursuant to a mutual agreement” that serves as the primary basis for investment decisions.
No matter what happens with the Fiduciary Rule, consumers should follow the adage “buyer beware” and take appropriate steps to become educated and understand how their money pays for investment advice and provides potential opportunities for building wealth.
About the author: Todd A. Moll, CFP®, CFA, is a director and chief investment officer with Provenance Wealth Advisor, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email email@example.com.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Todd A. Moll is a registered representative of and offers securities through Raymond James Financial Services, Inc., Members FINRA/SIPC.
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