The U.S. Department of Labor recently issued a new Rule for advisors dealing with retirement accounts.
Some background is in order here. Advisors are held to a legal standard of conduct when dealing with investors. But different advisors are held to different standards. Registered Investment Advisors (RIAs) which we are, are held to a “fiduciary” standard of conduct. This means the advice we give has to be in the best interest of the client. Period. This sounds pretty obvious, right? Why would an advisor who is being paid by a client not give advice that is completely in the best interest of the client?
Well, there is another standard that other advisors are held to, a ‘suitability’ standard. Let me explain the difference. Let’s say that there are two investment products that are both appropriate for a client. They each have the same expected return, the same level of risk, the same diversification, etc. But, one investment charges a higher fee/commission than the other. A ‘fiduciary’ can only recommend the product with the lower fee. This makes sense. An advisor held to the ‘suitability’ standard can recommend the higher fee product. Yes, the fee is higher which favors the advisor, but the product is still ‘suitable’.
The question you might ask is why are all advisors not held to the highest standard? Well, where you stand depends on where you sit. Many advisors who are held to the suitability standard are fighting like mad to protect their turf. The Department of Labor feels this push back and is therefore only requiring that the highest standard be met in retirement accounts. If you are advising on non-retirement accounts and were previously held to the suitability standard then you are still held to that suitability standard.
The new Rule will be implemented in 2018 so expect a lot more legal jostling and political pressure between now and then. The chart below shows the importance of retirement accounts to Americans. It is vital that investors get good advise that is in their interest, and their interest alone.
