The word ‘fiduciary” has been in the main stream news a bit over the past few months. If you read investment and financial planning oriented news like I do, you would see it mentioned in many news stories every day.
So, what’s all the fuss about? What is this fiduciary thing, and why is it such a newsworthy topic? Well, in short, it’s a very simple concept that turns out to be not so simple when the government tries to turn it into policy.
The Fiduciary Concept – So Simple
Fiduciary is a strange, rarely used word, but in the context of financial advice it represents a very simple concept. To be a fiduciary, the adviser must put the best interests of the client ahead of his or her own personal interests. It’s really that simple.
You would think the fiduciary standard of putting the client’s best interests first was built into the term adviser. I mean, isn’t that what an adviser does - provide advice that is in the best interests of the person being advised? Unfortunately, that is not what financial advice means. In America, you can sell your clients financial products they don’t need because you earn a fat commission on the sale and still call yourself an adviser.
I’ve never liked that. I find it misleading and unfair.
If the Fiduciary Concept is So Simple, How did it Get So Hard?
President Obama also found it misleading and unfair for people to call themselves advisers, but not put their clients’ best interests first. He directed the Department of Labor (DoL) to develop a fiduciary rule that requires anyone providing investment advice on retirement accounts to be held to a fiduciary standard. After months of public debate, drafts, and revisions the DoL released the Final “Conflict of Interest” Rule in April 2016.
The rule itself took 58 pages to explain how the government was now requiring any investment advice on retirement accounts to be in the “best interests” of the client. Additionally, the DoL has also published an 88-page rule known as the Best Interests Contract Exemption – which essentially provides exceptions to the Best Interests rule to allow so-called advisers to continue accepting compensation models such as commissions and revenue sharing.
You see, the government can’t just tell investment advisers they have to work in the best interests of their clients. They have to spell out what best interests means. Then they have to spell out who a financial adviser is. Then they have to spell out who the client is. Then they have to spell out what things are specifically prohibited. And then, of course, they have to spell out how to get an exemption to the things that are otherwise specifically prohibited so the financial adviser can keep on doing them anyway. Because if the government doesn’t spell those things out in the rule the courts will eventually have to determine what the government meant when it said financial advisers must work in the best interests of their clients.
Fixing old problems with new laws can be strange, messy business.
Is the Problem Fixed Now?
The President and the DoL correctly identified a very simple (to understand) problem and has given us a highly complex system of new rules to fix it. Will it help? Many people are already proclaiming it a success, but I am not yet ready to join them. While I am an ardent believer in the fiduciary standard, the rule was just released last April, and financial advisers are not even required to abide by it until next April. I think we need to give it some time to take effect.
I also think there is a very real probability many who call themselves advisers will find ways to skirt the law. Most advisers already provide you with a 25+ page document that most people don’t read. They will just increase that to 35+ pages and bury their exemptions in it someplace. They’ll be legally covered and you still won’t be getting real advice. (I got into this business because I am skeptical, and that hasn’t really changed.)
Also, let’s keep in mind the rule only applies to retirement accounts. If you have money in an account that isn’t a covered retirement account, then financial advisers are not required to give you a fiduciary level of care when advising about those accounts. They can still sell you financial products that are not in your best interest to own. They just can’t sell them to you in your IRA or 401K.
How to Find the Good Guys
There are financial advisers out there who don’t play those games, though. They want to provide you with honest advice and they will provide you a fiduciary level of care no matter which of your investment accounts you are discussing. The problem is finding them because the bad ones are allowed to call themselves advisers.
So don’t just look for a financial adviser. Look for one who promises to provide a fiduciary level of care. That’s the word that means your interests must come before the adviser’s interests. If your adviser is willing to put that word in their client service agreement and their form ADV-2 (that mass of documents that makes you think you would rather eat something directly from a dumpster than read them), then you can have confidence you are working with a true adviser. Someone who is giving you honest advice, not just trying to sell you a product.