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Could the New Fiduciary Standard Impact You as an Investor?


The Department of Labor is updating the fiduciary standards that govern how financial professionals should treat customers. We look at what this might mean for you.

Individual Retirement Account

Physicians have the Hippocratic Oath. Financial professionals have the fiduciary standard. Both offer direction for how the professionals should treat their patients or customers, and both deal explicitly with the concept of “doing no harm.”

If you’re not familiar with the fiduciary standard, you can take a look at the basics here, and also gain an understanding of the difference between a fiduciary standard and a “suitability” standard. Briefly, registered investment advisors and other persons acting in a fiduciary capacity must avoid conflicts of interest, operate with full transparency, and generally put the best interests of the clients ahead of their own. But not all advisors, broker dealers, and other financial counselors operate under that same standard. Many, including brokers and others who can provide suggestions regarding IRA rollovers, are governed by a standard of “suitability” — which means they are only required to ensure that an investment is suitable for the client at the time of the investment. That can be a big difference.

Now, the Department of Labor is on the precipice of updating the decades-old standards for financial professionals in a way that would re-write the rules for investment advice and sales to retirement plans and individual retirement accounts—essentially to strengthen protection of investors. The biggest impact of the likely changes will be on advice and sales brokers and advisors offer to IRA account holders, and on recommendations regarding IRA rollovers.

Any downsides to greater protection?

That couldn’t be bad, right? Stronger protection, and a greater emphasis on brokers and other financial professionals acting in your best interests? In an of itself…no, that couldn’t be bad. But nothing happens in a vacuum. The new rules, which are expected to be complex and are likely to include significant enhancements to disclosure requirements, are likely to increase the administrative overhead at investment companies and could have a significant impact on the legal liabilities of brokers and advisors. There are, of course, costs associated with implementing these changes. At least a portion of those costs is certain to be passed on to investors in the form of higher commissions and fees.

Proponents of the changes argue that increased transparency is worth the complexity and some higher fees, and that completion in the marketplace will ultimately keep fees low. The overall impact for physicians will likely be less than it will be for those in lower income brackets.

If you have an advisor you work with regularly, check with him or her before and after the new standards are released to make sure you understand the impact of the changes, either on the costs or the level of service your advisor provides. The final rule could ultimately look a bit different; thus, the changes investors can anticipate could change as well.

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice