Why It’s Critical to Work with a Fiduciary Financial Advisor

Positive Outcomes from the DOL to You

Consider the word “fiduciary.”

In April of 2016, the term “fiduciary advisor” finally gained some much-needed traction within the public’s consciousness when the Department of Labor (DOL) introduced its “fiduciary rule.”

The DOL’s rule was created to increase both the accountability and transparency of those advisory professionals who make investment recommendations inside the retirement plans of clients.

Simply, it was intended to protect consumers who are using things like 401(k)s and IRAs to save for retirement.

But after two years of delays and debate, the DOL’s attempt at invoking a fiduciary rule came to a screeching halt when on March 15th, 2018, it was snuffed out by the Fifth Circuit Court of Appeals in New Orleans by a 2-1 margin.

As a final (perhaps) nail in the rule’s coffin, just a few days after the decision in New Orleans, the DOL announced it would no longer seek to enforce its original rule. (The whole thing could still end up before the Supreme Court, but that’s far from certain.)

First, three items to consider about the rule, followed by some things you should know about fiduciary advisors:

  • First, the essence of the DOL’s rule didn’t go far enough.
    It’s my opinion that ALL advisors should act in a fiduciary capacity for their clients 100% of the time, and not just when advising inside retirement accounts.
  • Second, the DOL’s rule was confusing.
    Had it survived, non-RIA advisors would still be allowed to make non-fiduciary recommendations outside of retirement plans.
  • Third, I believe the SEC is better equipped to create such laws.
    While I want to see laws created that truly protect consumers, the rule was going to be difficult to enforce because the DOL is not set up to regulate the complex financial services industry.

But after all that, the DOL rule, however flawed, has already had a positive impact. That’s because it:

  • Started a long-overdue dialogue about the importance of fiduciaries
  • Has actually driven some questionable advisors from the industry
  • And, I believe, could lead to the creation of an enforceable rule with more teeth at some point in the near future

So, what’s a fiduciary and what does it mean for you?

A fiduciary duty is the highest standard of care.”
Cornell University Law Dictionary

There are a lot of different professions that offer at least some form of investment advice, Including:

  • Insurance salespeople
  • Stockbrokers
  • Bank salespeople
  • Financial advisors (a generic title)
  • And Registered Investment Advisors (RIA)

I won’t get into the specific standards for each, but from the list above, only one, a Registered Investment Advisor (RIA) such as Allworth Financial, is both independent and has a fiduciary duty to act in the best interests of its clients 100% of the time.

In defining the fiduciary responsibilities of an independent Registered Investment Advisor, here are some of the guidelines that the Securities and Exchange Commission (SEC) sets, stipulating that RIAs must:

  • Act in good faith 100% of the time
  • Never mislead a client in any way
  • Never allow a conflict of interest

To breach any of these responsibilities could result in considerable penalties, including fines, decertification, suspension or even imprisonment.

Now, compare the fiduciary standards of an RIA with the less stringent “suitability standard” of most insurance agents and stockbrokers. Among other things, the suitability standard dictates they:

  • Disclose material information
  • Charge “reasonable” fees
  • Disclose conflicts of interest

Just how prevalent are fiduciary RIAs compared to other financial sector professions?

There are over 400,000 people licensed to sell insurance in the United States,[1] and who may, in turn, sell or recommend investment products. Conversely, there are only about 12,100 RIAs in the entire country.[2]

If you assume that there are fewer RIAs because the laws and standards are more restrictive, and the processes more regulated, you’d be correct.   

Now, to be clear, at Allworth Financial, we are indeed licensed to sell insurance, however, we don’t.

The fact is that we maintain insurance licenses so that we can provide recommendations as part of the comprehensive financial plans we create for clients.  

How do you find an RIA?

If you aren’t already a client of Allworth Financial, and you want to vet a potential advisor to find a true fiduciary (I encourage you to research us, as well), what should you do? You can:

  • Use BrokerCheck.com (it will alert you to any derogatory legal or financial information about your potential advisor)
  • Directly ask the prospective advisor if he or she is a fiduciary registered with the SEC
  • Ask to see their credentials, degrees, and licenses
  • Ask if they receive third-party compensation for making recommendations
  • Then ask how they get paid (you’re typically looking for a fee-based financial advisor)
  • And, finally, ask if there are ever any other fees or charges, and, if so, what are they?

Conclusion

A big advocate of fiduciary investment advice and retirement planning, I’m guardedly optimistic about the prospects for the SEC to follow up with an enforceable rule with teeth that will be better positioned to succeed (than the DOL’s rule).

But the DOL’s failed rule has certainly helped to put the spotlight where it belongs.

If you have any questions, contact Allworth Financial, today.

[1] https://www.bls.gov/oes/current/oes413021.htm
[2] https://www.statista.com/statistics/614815/number-of-rias-employed-usa/