On Feb. 3, the Trump administration signed an executive order that may derail a rule that the Department of Labor (DOL) had planned to implement to help protect retirement savers. Briefly, rather than being forced to take on the role of “fiduciary” that the DOL rule would’ve demanded, this new directive will continue to allow brokers and certain types of advisors to place their own interests ahead of those of their clients.
Even though I’m a financial adviser who has acted in a strict fiduciary capacity for over two decades, I applaud this executive order. Here’s why:
SEC protections only extend so far
The U.S. Securities and Exchange Commission (SEC) is the main regulatory body responsible for monitoring advisers and ensuring that the investing public isn’t getting ripped off. The mission of the SEC is: “To protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
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Pretty clear, right?
As a principal in a registered investment advisory firm, I’m already regulated by the SEC and have a legal duty to operate as a fiduciary, which means I only make recommendations that are in my clients’ best interests.
That responsibility is something that I take very seriously.
If I were not registered with the SEC and, say, instead, was employed as a representative for a brokerage firm (like the ones affiliated with many of the large banks), I would instead be regulated by the Financial Industry Regulatory Authority (FINRA).
Basically, FINRA is an independent organization that does much of the regulatory work that would otherwise fall to the SEC.
The problem with ‘suitable’ investments
Why is this important? Because the entities that operate under the SEC’s Investment Advisor program are required to act as fiduciaries, while those that operate as brokers under FINRA’s jurisdiction need only offer products that are “suitable” for clients.
If you think the word “suitable” is too vague, you’re correct.
While the products offered by brokerage firms can be lousy, expensive and not in the best interests of their clients, just as long as they are deemed “suitable,” the broker is usually protected from liability.
For years I’ve been asking people “in-the-know” to explain to me why the SEC doesn’t do something to address this issue. It wouldn’t be difficult. They could require any financial adviser to act as a fiduciary, or they could create some clearer (and simpler) guidelines so that everyday investors can easily understand the differences.
For example, perhaps those individuals who sell commission-based investment products manufactured by their parent companies shouldn’t even be allowed to call themselves “advisers.”
DOL’s solution comes with a flaw
The fact is, the SEC, while having discussed this matter internally, has still done nothing to address the fiduciary issue.
This is why the Department of Labor acted. Part of the DOL’s mission is: “To foster, promote, and develop the welfare of the wage earners, job seekers, and retirees of the United States.” Given the fiduciary “vacuum” created by the SEC’s continued inaction, the DOL figured it would step in and try to protect the retirement plans of workers and retirees, alike.
One major shortfall of the DOL, however, is that it has no jurisdiction to regulate non-retirement accounts. Under this fiduciary rule, brokers would be required to act as fiduciaries only for IRA assets, but they could still continue to sell garbage to investors who have money outside of their retirement accounts.
While well-intentioned, the DOL rule gives investors a false sense of security, in my opinion. Simply, since the ruling, many of the people I’ve encountered had assumed that brokers and advisers were going to be required to act as fiduciaries in every instance.
The real fix that we need to protect consumers
Some people believe that any protection, no matter how limited or flawed, is enough. But I disagree.
What I would like to see is for the SEC to embrace its responsibility and enact a blanket fiduciary standard for anyone who calls themselves a “financial adviser.” This would protect the public and leave no ambiguity by ensuring that all advice rendered by financial advisers is always in the best interests of the client.
Until then, you can still protect yourself. For starters, ask your adviser if he/she is acting as a fiduciary in ALL circumstances. Are there times when they remove their fiduciary hat and put on the hat of a broker, earning commissions for products that are sold? Ask if there are ever times in the relationship where they are not legally required to act as a fiduciary. Finally, ask if they are willing to sign a fiduciary oath, such as the one found here: http://www.thefiduciarystandard.org/fiduciary-oath/.
The bottom line is that you want to make sure your advisor is working in your best interest, not in his or her own best interest.
Hanson's new book, Personal Decision Points, can be found on Amazon.
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