We’d all like to place our money with a trusted financial advisor and never worry about it again. But life isn’t that simple—and in the world of financial planning, it’s about to get even more complicated.
Perhaps you’ve read about the Department of Labor’s new regulation, which kicks in next April, that advisors must be fiduciaries to provide financial advice and services for retirement assets. What exactly does the new rule mean, and how does it impact you?
Some Background
You may not know there are two types of people who want to invest your assets for you.
One type, frequently referred to as stockbrokers, are sales people. They are held to a lower ethical standard that does not require them to put their clients’ interests first. Instead, their investments must conform to a “suitability” standard, which says that investments they make on behalf of a client must only be “suitable” for that client—a broad and difficult to enforce standard.
The other type, frequently referred to as financial advisors, are held to a higher ethical standard that does require them to put their clients’ interest first. This is called a fiduciary standard of care. Therefore, financial advisors are financial fiduciaries.
It sounds pretty simple, but it isn’t. It is perfectly legal for stockbrokers to claim to be financial advisors, a term which in and of itself has no legal definition. This claim does not make them fiduciaries. It’s just a deceptive claim designed to reduce our sales resistance.
It is up to the investor to know the key differences between sales people (non-fiduciaries) and real financial advisors (fiduciaries).
The Labor Department’s New Rule
The DOL recently passed a regulation that mandated that only fiduciaries can provide financial advice and services for retirement assets held in qualified plans—401ks and IRAs.
This regulation is supposed to protect investors’ retirement funds by locking out commissioned sales people who are not financial fiduciaries.
As you might imagine, Wall Street doesn’t appreciate being excluded from lucrative retirement asset markets that produce billions of dollars of revenue. As a result, Wall Street firms have spent millions lobbying politicians to water down the provisions in the regulation.
The irony is that this regulation is actually quite limited. Because when it comes to personal assets that are not held inside qualified plans or IRAs, you’re on your own.
The DOL has no jurisdiction over personal assets. The two regulatory agencies that oversee the firms and advisors that provide advice and services for personal assets are the SEC (Securities & Exchange Commission) and FINRA (the Financial Industry Regulatory Authority). The SEC regulates financial advisory firms that provide advice and services for fees, and FINRA regulates brokerage firms and professionals who sell financial products for commissions.
States also have regulatory authority over firms and professionals who sell investment and insurance products.
Selecting a Fiduciary Advisor
How do you identify fiduciary financial advisors? Know what you’re looking for.
First, there are the advisors’ registrations. Fiduciaries are Registered Investment Advisors (firms) or Investment Advisor Representatives (individual professionals). Second, they are compensated with fees for their advice and services. Sales people are not allowed to charge fees. They are paid commissions by third parties when they sell investment and insurance products. Third, you should require advisors to confirm in writing that they are acting in a fiduciary capacity when they provide financial advice and services for fees.
Trust a Fiduciary Advisor
Should I automatically trust a fiduciary financial advisor?
Just because financial advisors are fiduciaries, you cannot assume they are trustworthy. After all, Bernie Madoff was a fiduciary for the fee side of his business. You still have to do your homework: Use FINRA’s BrokerCheck service (it’s at finra.com) to view the advisors’ compliance records. Then, check out the advisors’ firm ADVs—legally mandated disclosure forms—on the SEC website.
You should also check with the regulatory agencies in your state: State Securities Commissioner, State Insurance Commissioner. Search the advisors’ names and their firms’ names. Add key words like: scam, fraud, lawsuit, and bankruptcy to your searches. Bear in mind that the fact of a complaint filed against an advisor doesn’t necessarily mean that he or she did something wrong; it could just mean that a disgruntled investor didn’t get the outcome he was hoping for. In that case, it’s best to ask the advisor in writing what happened.
None of this will guarantee you investment success, of course. But if you do your research, you’ll likely avoid unwanted issues with your advisors and your money.
