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What is an Investment Fiduciary (and why it should matter to you)?

Back in the fall of 2016, there was quite a bit of news regarding the question of what an investment fiduciary is based in part on a Department of Labor (DOL) ruling. As with many political decisions, the long-term impact wasn’t entirely clear. The Trump Administration sought to delay the fiduciary rule but was unsuccessful.

What does that mean for financial advisors? It means we’re set for the new rules that took effect on June 9, 2017, even as the administration continues to review the finer points of the law.

What is an investment fiduciary?

An investment fiduciary is a financial professional who is legally bound to act in the best interests of their clients but not all of them do. In the past, there were financial advisors who chose to act in their own best interests or the best interests of the portfolio, over the best interests of their clients, which is why new fiduciary standards were put into place. Fortunately my practice has always been to act with the highest fiduciary standards, always putting my client’s needs and interests first. [Financial Firms Are Not All the Same.]

The current standard is akin to selling someone clothes that fit while the new standard is that the clothes have to fit while also making the customer look good. It’s a subtle yet significant change to the law.

How will the new fiduciary rule impact my relationships with clients?

It won’t impact my clients because I’ve always acted as a fiduciary. I work on behalf of my clients and in their best interests. We work together to develop a financial strategy that we then implement to help them reach their goals whether that’s to retire at a certain age, buy a home, sell their business, get married, have kids, or take a dream vacation.

It should be noted that the new fiduciary standard is going to be applied only to retirement accounts (IRA, 401K). Non-retirement accounts will have different rules in place but it expected that most companies will uniformly apply standards.

What should every person who works with a financial advisor know about the fiduciary rule?

The Department of Labor is still reviewing the fiduciary rule so there is a chance it will be changed yet again. It is the responsibility of a financial professional to be aware of the latest changes to law, just like a tax or legal professional stays educated on current events that impact their clients. There’s still a lot we don’t know and likely won’t for the remainder of this year.

Here’s what we do know about the investment fiduciary rule as it stands today:

  • The fiduciary rule applies to retirement accounts at this time but many financial firms are making the changes across the board under the assumption that all investments will be subject to the rule in the future.
  • To provide a recommendation to a retirement investor, the recommendation needs to be in the best interest of the investor. Requirements including documenting an interest analysis are not required until January 1, 2018.
  • Charge no more than reasonable compensation. The question of what exactly that is remains unclear; most companies will set their own internal practices.
  • Provide no leading statements about investment transactions, compensation, conflicts of interest, and tell the truth. At this time, there is no way to measure or police this regulation so time will tell how effective it can really be.

What does this mean for retirement investment accounts?

Some investment companies are restricting their advisors by making them change the relationship with their clients, regardless of what the client desires. That’s not what we’re doing.

Cambridge Investment Research said they’re not going to make us force you into one type relationship if you don’t want that. Instead, we will have you sign a best interest contract if that’s the type of relationship you would prefer.

In the case of a best interest contract, compensation may be changed, types of investments that you hold may be changed, or the company that manages those assets may change. This is an effort to equalize commissions, and make fees and costs more transparent to you as a client.

What does this mean for consumers?

As consumers, it means having a greater awareness and understanding of what your financial advisor is doing on your behalf when it comes to retirement and other investments. If you don’t have a clear understanding, ask questions, and if you don’t like the answers or they don’t know the answer, it might be time to find a new financial advisor.

Just know that if you have questions about the fiduciary standard or best interest contracts and how it applies to you, Heritage Financial Strategies is here to answer your questions.