This article was first published in the business section of the Tacoma News Tribune, Sunday April 2.
By Gary Brooks, CFP®
The Department of Labor’s Conflict of Interest Rule, also known as the Fiduciary Rule, was set to be implemented April 10. It now appears destined for at least a 60-day delay and possible revision, if not complete repeal under the Trump administration.
Anyone who invests in a retirement account should understand the basics of this rule, which intends to clarify the nature of advice and adviser compensation for investments in retirement accounts.
This legislation draws a yawn, if any attention at all, from most people who don’t understand the difference between types of investment professionals and conflicts of interest. At a high level, the distinction is between investment product sales people who are held to what is known as the “suitability” standard and advisers who accept a fiduciary obligation to act in the client’s best interest.
The fiduciary obligation is a step above the suitability standard, which suggests that recommended products be generally appropriate given a client’s circumstances.
Large brokerage firms and insurance-based investment firms have fought the fiduciary standard to protect commission-based compensation structures and the types of products that are often at the core of their recommendations.
The DOL rule has been upheld by court challenge, but regardless of whether it is ultimately implemented, more investors are seeking advice that is unconflicted, cost-effective and preferably backed by a thorough financial plan.
While this rule has noble intent, it falls short of being complete because it does not cover nonretirement accounts. For all investment accounts to be covered, the implementation of these new standards would have to be guided by broader authority than the Department of Labor.
This may seem like the legal playground of regulatory entities and investment firm lobbyists that you have no interest in. But it is investors who pay for every step of it. While lawyers and politicians wrangle, investors continue to own, and buy more, products with high fees (and often penalties for exiting these products) from brokers with conflicts of interest.
There are certainly many good financial advisers who operate under these conflicted rules and people who have achieved financial security working with them. But there also are many people who have been overwhelmed by complexity and lack of financial literacy on their way to being sold products that may not be in their best interests.
In the past month, I’ve reviewed account statements and taken calls from several people who have investment predicaments precisely like those the Department of Labor was trying to reduce with the initial Conflict of Interest Rule.
These are bright, successful people, who couldn’t identify the conflicts and the costs at the time they were sold the products.
They included investments in privately traded real estate investment trusts (REITs) that are not regularly valued, IRAs investing in physical gold bullion because of the “coming crisis,” layers of variable annuities locking up most of a person’s otherwise liquid retirement accounts, long-term care insurance with excessive benefits and premiums, and the king of poor service, high fees and conflicts of interest — the 403(b) for teachers. Most of these products are sold by brokers whose communication fades after they receive their sales commission. There is no incentive to provide ongoing service and advice when the compensation was paid based on a transaction to start the relationship.
Now, more than ever, you have options for investment advice and financial planning that are transparent.
When evaluating your current financial adviser, or performing due diligence on a new one, start by asking if their firm allows them to sign a fiduciary oath to provide advice and investments that are in your best interest.
Next, review their record for any regulatory action or discipline. Brokers’ records are publicly available via FINRA Broker Check. Records of independent registered investment adviser firms are available via the Securities and Exchange Commission website.
Then understand how the adviser is compensated. Did they just return from a Caribbean trip paid for by an investment firm for reaching a sales quota? Do they tout themselves as a “top producer?” Or are they an independent adviser only paid by their clients?
When you are clear that conflicts of interest are eliminated, or at least adequately addressed, then understand how transparent the proposed investments are, what resources will be used to build and maintain a plan for long-term financial security and how they expect to communicate with you.
This way, regardless of whether government regulations make it a requirement, you will have done your own due diligence to identify an adviser and an investment approach that you understand and trust.
Gary Brooks is a certified financial planner and the president of BHJ Wealth Advisors, a registered investment adviser in Gig Harbor. Reach him at firstname.lastname@example.org.
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