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What the New DOL Fiduciary Rule Means for Investors


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by  Keith McKenzie

As you may have heard, after many years of pushback, lobbying, and negotiations, the Department of Labor’s (DOL) fiduciary rule was finally implemented on June 9. It’s a phased implementation, meaning that full enforcement of the rule won’t happen until January of next year, but phase one nevertheless has brokers and advisors across the country frantic at the implications. Investors, meanwhile, are left scratching their heads, wondering what, exactly, the new rule means for them.

If this sounds familiar, we have an important piece of advice for you right off the bat: Don’t go to your advisor and ask them what the new DOL fiduciary rule means for you. Instead, take a minute to read this article so that you understand what the rule is and how we got here. Then go to your advisor and ask them a few of the questions we’ve provided below. You may be surprised at the answers you get.

What Is the New DOL Fiduciary Rule?

The new DOL rule expands the definition of “investment advice fiduciary” according to the Employee Retirement Income Security Act of 1974 (ERISA) such that when it comes to retirement accounts, advisors must now act in the best interest of their clients and put their clients’ interests above their own. It furthermore says that all fees and commissions must be plainly disclosed to clients. Essentially the rule tells advisors:

    • 1. Don’t make misleading statements to clients


    • 2. Receive reasonable compensation


    3. Make investment recommendations that are in the best interest of your client

If these three guidelines seem to you like the most obvious, bare-minimum code of conduct for a financial professional, you are not alone. If you assumed that your financial advisor was operating according to these guidelines, you are forgiven for what ought to be a perfectly reasonable assumption.

The fact is, however, that financial professionals in every corner of the country are scrambling to figure out how their business model could possibly survive the implementation of such a rule, even going so far as to suggest (disingenuously) that the real victims of the rule will be low-income investors. The mental jujitsu required to unpack this claim is so convoluted that we won’t explore it here, but suffice it to say, the simple, honest code of conduct that the rule will require has many advisors shaking in their boots. It is actually assumed that many will close up shop rather than attempt to modify their business models to accommodate it.

How Did We Get Here?

So how did we get to the point where the implementation of such a seemingly obvious rule would have so many advisors so concerned? The answer hinges on the term “advisor.” Up until now, only Registered Investment Advisors (RIA’s) were held to a fiduciary standard. Other financial professionals were held only to a suitability standard. These two standards are as follows:

Fiduciary Standard: The financial professional must act solely in the best interest of the client when providing personalized financial advice.

Suitability Standard: The financial professional must have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer (based primarily upon the financial objectives, income level and age of the client).

In essence, there are three types of investment professionals: advisors, salesmen (broker-dealers), and those who try to do both. True “advisors” are held to the fiduciary standard. Knowing this, many salesmen in the industry have co-opted the term, and otherwise played fast and loose with which standard they are operating under at various phases within their transactions with investors.

If you walked onto a used car lot and an employee walked up and introduced himself as an “Automotive Advisor”, you wouldn’t believe for a second that he’s there to give you sound advice as opposed to selling you a car. You’d assume that employee is not only going to try and sell you something, but he is also going to try to take advantage of you in the process because you have less knowledge about cars than he does.

Take that same employee, put him in a nicer suit, set him up in a retail financial firm, and give him some industry credentials behind his name, and the outcome is much different. In that situation, you would justifiably believe that this “advisor” has your best interest at heart. In reality, though, he’s still a salesman, selling you a product, and, yes, he’s likely going to try to take advantage of you in the process simply because you know less about how financial products work than he does. The unfortunate reality is that a lot of advisors these days are nothing more than used car salesmen for financial products.

The financial industry is taking much umbrage at the implementation of the new DOL rule, but the fact is only the industry itself is to blame for the rule’s existence. It is the industry’s fault for allowing salesmen to call themselves “advisors” for so long. Because the industry failed to limit the designation to those advisors who weren’t compensated for selling financial products, we find ourselves in the position where the government has to come in and demand that we put our clients’ needs first. It’s laughable, really, that we allowed it to come to this.

What the DOL Fiduciary Rule Means for You

At this point, if you’re an investor, you should be wondering how this new rule will affect your relationship with your advisor, if at all. If your advisor is a true advisor and not, in fact, selling things, the new rule will have very little impact on how he or she operates their business, and hence will have little impact on you as well.

If, on the other hand, your advisor’s business model is founded on a lack of transparency with regards to which standards they operate under, you might find them dancing like Fred Astaire when it comes time to explain why they have not acted solely in your best interest over the course of your relationship. For advisors like these, the jig is up.

The sleight of hand performed by such advisors goes like this: A firm will be dual licensed, with both an SEC license under the Investment Advisors Act and a Series 7 license under Financial Industry Regulatory Authority (FINRA). The former is held to a fiduciary standard, while the latter is only held to a suitability standard. Firms like this will say that they are acting in a fiduciary capacity—and technically they are. Because when they are wearing their SEC license hat and planning your investment portfolio, they are obliged to act as a fiduciary. But when they actually go to build your portfolio, they effectively switch hats to the Series 7, and are only obliged to follow suitability standards. Of course, they let you go on believing that they are acting in a fiduciary capacity the entire time.

Questions to Ask Your Financial Advisor

To fully understand how the DOL rule will affect the relationship you have with your financial advisor—and to find out if they’ve been less than transparent with you up until now—there are a few questions you should ask.

    • 1. Is our arrangement fee-only, fee-based, commission-based, or some combination thereof? Anything less than fee-only is a “buyer beware” relationship.


    • 2. Will you be held to a fiduciary standard for all of the accounts I have with you, both taxable and non-taxable? The DOL rule applies only to non-taxable investments. It’s in your best interest to know if your advisor extends that fiduciary standard to the other accounts he or she constructs and manages for you.


    • 3. How will my accounts change now that you are held to a fiduciary standard? Understanding how the management of your investments will change moving forward will give you important insight into how they have been managed until now.


    4. Do you have a Series 7 brokerage license? A Series 7 license has always been a potential red flag that an investment advisor has the ability to be compensated based on a commission structure or sales incentive scheme.

The Takeaway

When an event in the financial industry directly affects investors like the DOL fiduciary rule could, many will instinctively turn to their advisors to try and understand the implications. In this case, that’s exactly what you shouldn’t do. It behooves you to understand the rule and its implications before you speak with your advisor.

Unfortunately, many financial advisors have been less than forthright with their clients. So much so that the government has had to step in and correct the matter.

The DOL fiduciary rule shouldn’t have been necessary. Financial professionals shouldn’t have to have a rule that obligates them to act in their clients’ best interests. Such is the case, however. The upshot is that the days of providing financial advice without being honest and transparent about whose interest one is serving are hopefully coming to an end.



Speak with an advisor

There’s no better time than now to protect the wealth you’ve built. Contact us today to speak with an advisor.