Many Americans who rely on financial professionals to manage their investments have long assumed their advisors are providing them with the very best financial advice.
Unfortunately, too often that has not been the case.
Some advisors are obligated to put their clients’ interests first when making financial recommendations, but many others are not.
Historically, stockbrokers have been under no obligation to make their clients’ best interest their number one priority when recommending investments. Instead, they have been allowed to suggest “suitable” investments to individuals. Under the suitability rule, brokers could suggest expensive annuities, mutual funds loaded with fees, and other questionable products that would generate handsome commissions for themselves and/or pad the revenues of their employer.
In contrast, registered investment advisors (RIAs), who have always been considered fiduciaries, must put their clients’ interests first, which prevents them from recommending less desirable investment products.
Consumer advocates have argued strenuously for years that Americans should not be victimized by this conflict of interest loophole just because they do not know it exists. Their protests have finally been heard.
Recent Change in the Fiduciary Rules
Earlier this month, the U.S. Labor Department introduced new rules that will compel all financial professionals to act in the best interests of their clients when advising them on their retirement savings. The new regulations, which faced intense industry lobbying and were six years in the making, will apply to retirement accounts, such as Individual Retirement Accounts (IRAs), 403(b) and 401(k) plans.
While the standard has changed regarding retirement accounts, it is important to note that stockbrokers and other non-fiduciary advisors can continue to act in their own or their firms’ interest when overseeing non-retirement accounts.
The government estimates that the new rules will allow individual investors to save roughly $40 billion over the next decade.
This is what Barbara Roper, the director of investor protection at the Consumer Federation of America, had to say about the new regulation in a New York Times interview: “It has the potential to really change the way advice is delivered to retail investors. It is a really big deal. Revolutionary even.”
One concrete change that investors should see is more money flowing into low-cost index mutual funds rather than expensive load (commission-paying) mutual funds that generate more income for stockbrokers. When choosing between two similar investments, a fiduciary is generally expected to select the lower-cost option, unless he or she can justify the selection of the higher-cost option based on valid investment criteria (past performance, greater diversification, liquidity, etc.).
In addition, stockbrokers must reveal any conflicts and direct individuals to an online resource that explains how they make money.
The U.S. Department of Labor offers a cheat sheet that contains questions that you should ask any advisor to determine if he or she is a fiduciary. You deserve to have an advisor act as a fiduciary when managing all your assets.
Dowling & Yahnke’s Perspective
At Dowling & Yahnke, we have been serving our clients as fiduciaries since our inception 25 years ago. When they founded the firm in 1991, Mark Dowling and Dale Yahnke believed the independent, fiduciary-based approach to investment advice was the best way to manage investments. This fiduciary approach applies to all clients and all types of accounts managed by Dowling & Yahnke. While the brokerage industry is being forced to change its standards, we will continue to do what we have always done, put our clients’ interests first. Recent regulatory changes underscore the importance to individual investors of choosing an advisor who acts as a fiduciary.