Review: Battle Continues Over Fiduciary Rule for Retirement Investments

Although articles like this one do not get much buzz outside of the industry, they play such an instrumental role in the quality of advice investors receive that it merits a greater spotlight than most other articles.

At the center of the conflict is a proposal by the Department of Labor that it says offers a new level of protection for investors in their dealings with brokers and other financial professionals who give advice on retirement accounts and defined-benefit plans. The proposal would require these professionals to always act in the best interest of their clients. The so-called best-interest standard is known as a fiduciary duty.

Financial advisers registered with the Securities and Exchange Commission already are held to this standard. But brokers for the most part are held to a standard of “suitability,” which requires them to reasonably believe that any investment recommendation they give is suitable for an investor’s objectives, means and age.

To give a reader a sense of how warped the industry can be, one just needs to read the opening paragraph. Specifically, “At the center of the conflict….the proposal would require these professionals to always act in the best interest of their clients.” How needing, or better yet, wanting to act in the client’s best interest could produce conflict is beyond me. I guess most financial-types missed the day we learned the Golden Rule back in kindergarten.

I applaud the Department of Labor forcing this issue because without it we are subjected to stories of how a big financial institution is putting their best interest (which is selling product) in front of a client’s – this very week alone. Ultimately, fiduciary standards are great for the end consumer. To find out where your advisor stands, simply ask them if they are held to a fiduciary standard or a suitability one.

In a fiduciary standard, the advisor works in your best interest. Within a suitability standard, the advisor is ultimately beholden to the institution he/she works for. The suitability standard is kind of like going to a car dealer, but a little worse. If you go to the Toyota dealership, you expect the salesperson to sell you a Camry and not recommend the Accord even though the Accord may be a better option for you. The only difference is that in a dealership, you at least know that as you walk onto the lot. Unfortunately, prospects don’t realize that suitability dynamic when they walk into the offices of most large financial institutions.


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