Anyone who hoped the Securities and Exchange Commission (SEC) might do the right thing and issue a uniform fiduciary standard holding brokers, bankers, insurance company advisors, and investment advisers working for Registered Investment Advisers (RIAs) to the same set of rules had to be disappointed. That didn’t happen.
Those who thought the SEC might share a set of rules that were straightforward and easy to understand and apply were also let down. The proposal spans hundreds of pages.
Individuals seeking investment advice who hoped they wouldn’t have to worry whether their broker, banker, or insurance company advisor was sharing advice as a fiduciary were also disappointed. This didn’t turn out to be a fiduciary rule.
Under the proposed rule, brokers, bankers, and insurance company advisors are still permitted to share investment advice without being fiduciaries.
What the proposal means for retirement plan sponsors
Nothing. Absolutely nothing.
Any plan sponsor receiving investment advice from a broker, banker, or insurance company advisor will still be receiving advice from someone who is not required to be a fiduciary.
If you work as an investment advisor for a brokerage firm, bank, or insurance company you are probably relieved. If you are a client of one of these firms, you should be concerned.
Why “best interest” isn’t good enough
The rule requires that advisors working for brokerage firms, banks, and insurance companies provide investment advice that is in the best interest of their clients, subject to disclosure of all conflicts of interest.
This is confusing to me because if an advisor discloses a conflict, that doesn’t mean that the investment advice is suddenly purified and becomes in the client’s best interest. Rather, any conflict of interest would seem to indicate that the advice really isn’t in the client’s best interest.
I have friends working in other industries who are often “conflicted” out of business deals because they have a conflict of interest. The investment advisory business is the only business that I am aware of where government regulators encourage sharing of conflicts of interest and then say it is still ok for an advisor to do business with clients by sharing conflicted advice.
My friends do not believe me when I tell them this. They think I am making it up.
Why it’s important that your investment adviser is a fiduciary
I believe that the fiduciary status of the advisor/adviser determines whether the advice a client receives is essentially good advice. Here’s an example that illustrates what I mean.
It is the difference between an adviser acting as a fiduciary who sits on the same side of the table with you, shoulder to shoulder, versus a non-fiduciary advisor who is seated across the table from you. The adviser on the same side of the table is your partner, while an advisor sitting on the other side of the table is just another provider.
Fiduciaries have legal liability for their recommendations. They get sued if you get sued if they give you bad advice. If you take investment advice from someone who is not a fiduciary, and there is litigation, you get sued but the non-fiduciary does not.
Full disclosure: I feel strongly about this subject because I am an adviser working for an RIA, so I’ve always been required to share advice as a fiduciary that is in my clients’ best interest. It’s hard for me to understand why anyone would take investment advice from someone who is not a fiduciary. And why would anyone take investment advice from someone who openly acknowledges a conflict of interest?
What you should do
The only investment advisers who will continue to be required to act as fiduciaries for the investment advice they share are advisers who work for RIAs.
You should find out what type of advisor/adviser you work with, whether they are signed on to your plan as a fiduciary, and whether any fiduciary limitations exist. Require them to state in writing the extent of their fiduciary relationship with your plan.
These rules are not final. Investor advocacy groups hope they will be improved. A 90-day comment period will follow their publication. Regardless, it appears that there will continue to be two ways clients can receive investment advice, from those advisers serving as fiduciaries and from advisors that don’t.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs, and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly $475 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.