Financial Planner as Fiduciary Explained
Despite a considerable amount of industry resistance, the Department of Labor (DOL) has finally released its final draft of their Fiduciary Rule making it mandatory for financial advisers place their client's best interests first when offering advice on retirement accounts. I can feel those thousand yard stares coming on that say, "Hold the phone, aren't they supposed to be doing this already anyway?" In a perfect world, of course. In the real one? Alas, not always. At least until now.
The average person has no idea what a Fiduciary is, fair enough. But it does scare me how many financial professionals I talk to who still don't know what it is either. So here we go.
Definition: fi•du•ci•ar•y - A financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client.
As a Fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest.
-- NAPFA (National Association of Personal Financial Advisors)
Plain English: A Fiduciary is required by law to put clients' interests ahead of their own. Any potential conflict of interest must be clearly disclosed. Different licensing and certifications may also come with their own specific fiduciary language and requirement. I personally am a Certified Financial Planner™ (CFP®) and an Accredited Investment Fiduciary™ (AIF®).
Another good thing to understand is that any financial professional - and this can include financial advisors, financial planners, stockbrokers, Wealth Manager, registered rep or Investment Advisor - can, and should, be a Fiduciary.
For example, the Financial Industry Regulatory Authority (FINRA) regulates stockbrokers. The suitability rule used by FINRA to regulate many of today's financial people essentially assumes that you, the client, would not be ruined financially if the investment sum is lost, i.e. that you can afford to take a risk. But just because you can 'afford' a risk doesn't mean you should take it, or would even consider it if you knew it wasn't in your best interest. As policy, this is pretty vague and really doesn't address much transparency regarding conflicts, fees or having the clients' best interest at heart. The new Fiduciary rules will go a long way to clarify the picture.
What's new in Fiduciary?
The new Fiduciary rules, which were announced this year , are about 100 pages long and make tough reading for those who not up on the latest investment jargon and love deciphering legalese. So let me give you a little insight into what it actually means for you.
Giving Fiduciary advice is not a new thing but the number of people in the financial industry who will be required to become accredited Fiduciaries will jump in the coming year. While this topic has been in the news, it probably won't make headline status until somewhere closer to the mandatory implementation date of April 1, 2017 or the final compliance day of January 1, 2018. Of course this begs the question if you could be getting better advice now, don't you think you deserve it now?
Hear me now: It is essential that your financial planner works in a Fiduciary capacity.
You as the client should feel safe that your advisor puts your financial success ahead of his own. Investment decisions can be hard enough without worrying if your stockbroker is only pitching something for her own quick commission. In the unregulated past, this was easier for those not working as a Fiduciary. In the future, Fiduciary requirements will change the financial salespeople do business.
These new policies will be a big change for the way many financial advisers do business; many will only change because they are being forced to do so. But if your financial planner doesn't want to get on board with the Fiduciary rules, you may want to ask yourself why?
What financial advisors do
As it stands today, large numbers of Americans have no idea how they are paying their financial advisor, investment guy, or insurance salesman. More importantly they probably have no idea exactly how much they are paying them because their fees are neither transparent, visible, nor clearly stated.
I've been helping people with their finances since early 2003, and I've always felt that putting my clients' needs ahead of my own in just good business.
I had a longtime client recently ask me, "Are you the only one who works this way?" Surely not, but as his fourth financial advisor in as many years he knew I was doing something different. Many people assume a financial adviser solely exists to pick investments, or beat the market, or open an IRA. That's part of the story, sure, but IRAs or investments are just a few or the available the tools to help people achieve financial independence. As a Fiduciary financial planner, my job is to use all available tools to help people make smarter financial decision over the long run.
If you are currently working with a Fiduciary Financial advisor, most likely not much will change for you with the implementation of the new rules. On the other hand, if you are working with someone who is more of a broker or other non-Fiduciary salesperson, you may receive everything from disclosures, to new forms to sign, to suggestions to move your accounts. Pay attention to any and all disclosures you might receive, ask questions and don't settle for half-baked answers. Don't be afraid to come right out and ask them if they are a Fiduciary.
New realities of the new fiduciary rules
Just because your financial advisor will now be putting your interests first doesn't mean that the market still won't go up and go down. You can still lose money in the 'best' accounts or, ironically, potentially make money in a non-suitable account. Likewise, your advisor will continue to get paid, only now in a (hopefully) more transparent manner. This means that the advisory fee (or similar term) will be clearly noted on your monthly statement.
Best Interest Contract Exemption (BICE) Agreements
If your account doesn't meet the new requirement of the Fiduciary Standard, you may be asked to sign a BICE agreement. This doesn't necessarily mean your account is bad, it may just mean your advisor is actually doing the right thing. It also means your adviser is most likely not acting as a fiduciary capacity at least on this account.
If you came to me for advice on accounts you already have we may need to keep them to avoid surrender charges, or to avoid realizing capital gains. In the cases I would use it, keeping the particular product is in your best interest. But, and this is a big BUT, it's still an account that wouldn't stand up to being in your best interest to open again now if we were starting from scratch.
On the other hand if your investment adviser refuses to get up to date and get on board with the Fiduciary rules, it may be time to look for another financial consultant.
These new rules are meant to help the average person be in a better position to make the right investment decisions and understand exactly he or she stands financially. You may be surprised to find out that your financial advisor is already a Fiduciary. If not, this may be a good opportunity to improve your accounts and secure your overall financial plan for a prosperous future and independent retirement.
Until next time, as always be fiscally fabulous because Your Money Matters.
DAVID RAE, Certified Financial Planner™ Accredited Investment Fiduciary™ is a Los Angeles- retirement planner with Trilogy Financial Services, a regular contributor to the Advocate Magazine, Huffington Post, Investopedia and other fine publications as well as a financial adviser proudly serving friends of the LGBT community for over a decade. Follow him on Facebook or via his website, www.davidraefp.com.
Fiduciary Financial Advice Does it Really Matter? originally Published on the Financial Planner LA blog
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