Investor trust has to be earned and if the new rules are followed, the financial industry will objectively and smartly help those who wish to participate.
The Court of Appeals 5th Circuit recent ruling substantially eviscerated the Department of Labor’s (DOL) fiduciary regulations by vacating it in a split decision. States which were in the process of promulgating their own fiduciary regulations seem to have put plans on hold.
The potential problem of states instituting fiduciary standards runs the risk of different unmatched regulations resulting in confusion to both investors and those who render financial advice. As the financial industry awaits guidance, it is expected the Securities and Exchange Commission (SEC) will at some point release its own regulations.
Upcoming Fiduciary Rule
In March 2018, the Certified Financial Planner Board of Standards, Inc. (The Board) released their Code of Ethics and Standards of Conduct effective October 1, 2019. The CFP® designation is considered the gold standard by many in the financial advising arena.
According to the Board, “The new Code and Standards includes a range of important changes, including expanding the scope of the fiduciary standard, requiring CFP® professionals to act in the best interest of the client at all times (italics added) when providing financial advice." This means that a CFP® professional must always act in a fiduciary capacity.
April 2, 2018, Mark Schoeff Jr. of Investment News, reported that Leo Rydzewski, CFP Board general counsel stated, “[CFP rules were] reasonably designed to prevent material conflicts of interest from compromising their [mark holder] ability to act in the client’s best interests.”
Of interest, the vacated DOL rule was specific for only retirement accounts. The Board’s position is to ensure that all accounts of anyone who is a mark holder acts as a fiduciary vs. picking and choosing which accounts are managed and possibly at different fees.
Schoeff stated, “Under the new rule, all CFPs — including brokers — must act in the best interests of their clients when providing financial advice.” It becomes incumbent on an investor to consider an advisor who is a fiduciary and earned the CFP® designation and is thus mandated to adhere to The Board’s compliance standards.
Registered Investment Advisor (RIA) vs Broker-Dealer
According to Miranda Marquit, “A registered investment advisor is someone who has completed the qualifications to be registered with the SEC and with applicable state agencies …The most important thing to remember about an RIA is that he or she is required by law to act as a fiduciary to clients.” Conversely, “A broker-dealer is someone who facilitates investment transactions."
Importantly, unless a broker-dealer is rendering financial advice they are only held to suitability standard and not acting as a fiduciary. In other words, “The broker-dealer can recommend investments that give him or her a bigger commission, even if there is a product that might actually be better for your situation."
Who to Call
Investors are able to self-trade at low fees and have access to assorted free or low-cost securities analysis. For those investors who are not self-motivated, there are broker-dealers who are available to make financial trades and charge for this service. Commission sales and fees have been the “bread and butter” of broker-dealers. The financial industry is moving to a fiduciary standard with increased fee transparency. As such, financial providers are moving to a fee-based model which may allow for a steady income stream from ongoing asset management.
Independent broker-dealers have been increasing recruitment efforts in hiring brokers and advisors. Broker-dealers have gone so far as to purchase RIA firms. RIA’s have access to investors seeking investment advice from fiduciary advisor professionals, i.e. a CFP® provider. These investment professionals are required to uphold the fiduciary standard.
Investors are willing to pay for this service usually on a quarterly basis for the expertise and peace-of-mind provided. This cash flow and investor loyalty is appealing to broker-dealers, however, investors have additional options when paying for fiduciary services.
The New Standard
The financial playing field is ever evolving and becoming increasingly competitive — The Board’s adopted.
On October 1, 2019, implementation of the new standards will raise the advice and conduct protocols when working with investors. The SEC and individual states are becoming more proactive in the fiduciary arena and are likely to have additional or complimentary rules in the near future.
Dan Moisand, a past president of the Financial Planning Association stated, “The new standard is not particularly burdensome to somebody who’s already doing financial planning and communicating with their clients. And most of the major firms are already subject to a fiduciary standard on the advisory side, so they understand the processes and procedures."
Investor trust has to be earned and if the new rules are followed, the financial industry will objectively and smartly help those who wish to participate. All of this could be a prodigious advancement for investors who seek advice from a fiduciary professional. As investor’s become more aware and proactive with what’s best for them, there can be a win-win for all concerned.