On Wednesday, April 6, 2016 the Department of Labor (DoL) issued its final fiduciary regs for investment advisors working with retirement accounts. The rules were aimed specifically at brokers who provide investment advice to clients under the “suitability” requirement (which exempted brokers from being fiduciaries). The issuance of these final fiduciary regs ends a long war that the brokerage industry waged against regulators, employing all manner of threats to avoid fiduciary responsibility (e.g.; small clients will not be able to receive investment advice — absolutely ridiculous) and spending millions on intense political lobbying. Who won? Remarkably, plan sponsors!
What is a fiduciary?
A fiduciaries responsibilities are both ethical and legal. They are required to provide advice that is in the best interests of their clients rather than themselves and cannot benefit personally from advice shared. Fiduciaries must adhere to the prudent person rule, which states that advisors should act with skill, care, diligence and use good professional judgment. Additionally, fiduciaries should never mislead clients, always provide full and fair disclosure of all important facts and avoid conflicts of interest. That seems reasonable, doesn’t it?
Fiduciary care vs. suitability
Investment advisors working for Registered Investment Advisory (RIA) firms are required to be fiduciaries, providing investment advice that keeps their client’s best interests first and foremost. Full disclosure here, my firm is a RIA and I believe in being a fiduciary to my clients.
Advisors who work for brokerage firms were allowed to exercise a lower standard of care to avoid fiduciary responsibility, called suitability, when providing investment advice to their clients. Suitability can best be defined as recommending investment options or products that are appropriate for the investor. There was no requirement that a broker put a client’s best interest before his/hers or the brokerage firms. This led brokers to recommend investment products that were best for the broker and his/her employer while only suitable for the client. The new fiduciary regs require that all advisors providing investment advice to retirement accounts be fiduciaries.
Fiduciary regs impact on plan sponsors
Nearly all positive. Most retirement plan sponsors have a hazy understanding of what a fiduciary is and if their advisor is acting as one. Plan sponsors working with advisors who haven’t been acting as fiduciaries will be approached by these advisors as they begin to define a new working relationship. They are likely to outline relationships that feature higher costs. There will also be additional paperwork to sign, which describes their fiduciary limitations.
If what you are hearing troubles you, keep in mind that there are plenty of RIAs out there who are eager to work with you in a cost effective way. Brokers were dragged kicking and screaming into a new fiduciary world. Don’t feel that you have to work with a broker who views his/her new responsibilities as a burden. These regulations benefit you, the plan sponsor. Any advisor who whines and complains about taking your best interests into account when providing investment advice is not worth working with.
Those brokers and advisors who weren’t acting responsibly as fiduciaries will be re-evaluating their business models. Many will find it difficult or impossible to adhere to their new fiduciary duties. Some may exit the business. All advisors will have until January 1, 2018 to comply with the new fiduciary regs. Now may be a good time to re-evaluate the relationship you have with your advisor, at the very least to gain clarity on his/her fiduciary relationship with your 401k plan.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, 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 is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 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, 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.