Americans overwhelmingly favor the intent of the Department of Labor’s so-called “fiduciary rule,” which went into effect on June 9.
According to a survey by Financial Engines, 93 percent of Americans think financial advisors who provide retirement advice should be legally required to put their clients’ best interest first. However, more than half of respondents (53 percent) mistakenly believe that all financial advisors are already legally required to put the best interests of their clients first.
The Department of Labor’s fiduciary rule, when fully implemented in January 2018, requires all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary, bound legally and ethically to put the client’s interest first. (Filbrandt & Company operates under this standard, and has for years.) Prior to this change, many advisers worked under what is known as the suitability standard. Their only obligation was to recommend investment options that are suitable for their clients.
For the past couple of years, you have likely heard many references to the fiduciary rule which left you uncertain or even confused about what it means in reference to financial planning. The following story about shopping for a vehicle illustrates the difference between sales professionals working under the fiduciary and suitability standards, and the difference you could experience between the two.
Imagine you need a new car, but you don’t know much about different options. You head to the closest car dealer, which happens to be a Chevrolet dealership. The dealer asks you to describe what kind of car you need, and you begin listing features and attributes that are best described as a Toyota Highlander.
Under the suitability standard, the dealer could say, “A Chevrolet Tahoe would meet all of your needs and we have some of those right over here.” The dealer makes the sale and gets the commission. You have a car that is suitable for your needs, but it isn’t necessarily what’s best for you because it is considerably more expensive than a Highlander. Since you don’t have a great deal of knowledge about the auto market, you are in the dark.
Under the fiduciary standard, the Chevy dealer would be obligated to say, “It sounds like you are describing a Toyota Highlander. We don’t sell those. In order to get exactly what you described, you would have to go down the street to Toyota and ask for a Highlander. I can sell you a similar model called a Chevrolet Tahoe, which is more expensive and it isn’t exactly what you described.” In this scenario, you have more information about your options and what is motivating the dealer.
The Chevrolet dealer has a clear conflict of interest in this situation. He can only sell Chevys and will lose the opportunity to earn a commission if the client buys a Toyota Highlander. Under the suitability standard, you end up with a product (Chevrolet Tahoe) that isn’t the best fit given your situation and it costs more than the better-fitting product (Toyota Highlander). Worst of all, you probably have no idea that you were given advice that did not put your interests first.
When the people surveyed by Financial Engines were told stories like this to clarify the differences between the fiduciary and suitability standards, it’s no surprise that 93 percent believe all financial advisers should work as fiduciaries.
Many financial advisers who work for broker-dealers (selling a specific company’s investment products) are transitioning to fee-only service, as opposed to collecting commissions for their revenue, as part of their transition to the new fiduciary rule. If you are working with a non-fiduciary adviser, he or she may have already discussed this change with you.
Our Filbrandt Report on the fiduciary rule outlines specifically how to determine if your current financial adviser is a fiduciary. For more information on how Filbrandt & Company can help if you are looking for a fiduciary adviser, please visit this page on our website.