FINANCIAL PLANNERS’ ADVICE IS ABOUT TO GET MORE TRUSTWORTHY, GUARANTEED
Pretty soon all of them — not just RIAs or CFPs — will be required to put clients first
The Department of Labor recently tightened the rules around some kinds of investment advice by requiring a “fiduciary standard.” And starting in April, many of those new standards will be in force.
In plain English, a fiduciary standard requires advisers to act in the client’s best interest above incentives for themselves or their firm. But does that mean your financial adviser was allowed to act badly in the past? And does it guarantee you’ll get good advice after April of next year? Not quite. “Society has long recognized the obligation of professionals to put their clients’ best interest first,” said Blaine Aikin, executive chairman at investment adviser training firm fi360 in Pittsburgh. Certain kinds of accredited advisers, including Registered Investment Advisors and Certified Financial Planners, have been bound by the fiduciary standard for decades. For those investors who rely on an adviser with RIA or CFP after their name, then, this ruling doesn’t change much of anything.
The challenge, Aikin said, is that the nature of “advice” has changed dramatically over the last few decades so that the interests of some financial professionals, including insurance salespeople or stockbrokers, aren’t always aligned with clients any- more. He likens the scenario to one in health care where the roles of both clinic and pharmacy become performed by the same company — with “predictable consequences of a lot of medication getting overprescribed.”
Under the Department of Labor rules, Aiken said, the fiduciary standard requires all financial professionals to always act with the client’s best interest, regardless of how they get paid — something that in many ways is overdue.
“Many people kind of assumed that their advisers ... kind of had this higher standard of care,” said Jamie Hopkins, the co-director of the retirement income program at the American College of Financial Services. “In the past, that wasn’t always the case. Now, it will be.”
CHANGES YOU MAY NOTICE Once the rules go into effect, it will be permissible for financial advisers to earn a commission on investments you purchase. However, those financial incentives will always have to take a back seat to the quality of advice.
“The rules say, let’s go to ‘planning ’ as the reason you’re getting paid, and away from ‘products’ as the reason you’re getting paid,” Hopkins said.
While there could still be conflicts based on commissions, Hopkins said disclosure requirements force financial advisers to lay out precisely what they are going to do for clients and why they are qualified.
“One of the things advisers are going to have to do is show their value for their fee,” Hopkins said. “You’re going to have to say, ‘Here’s why you should choose me; here’s what I plan to do; and here’s why I’m charging what I am.’ ”
And if those advisers don’t live up to their end and put their own profits ahead of yours? Then, under these new rules, the client will have a good chance at getting paid back by suing. The end result will likely be more intensive training and credentials among advisers, Hopkins said.
MORE CHANGES TO COME Some requirements under the new fiduciary standards trigger in April — but others, not until January 2018. So while advisers likely will be moving toward more training and better client outcomes, they will not have to formally be in compliance for some time. “The Department of Labor fiduciary rule is not like a light switch,” said Aikin, of fi360. “We didn’t go from completely off to on overnight. We’re not all the way to the brightest level yet, and it’s going to continue to slide and change.” Hopkins agrees more changes are coming. He contends longer term, this focus on the client’s best interests will reshape what kinds of products exist, eventually changing those that may not have made much money for anyone but financial services firms. “(The Department of Labor’s new rule) is all about making sure both the client and the financial adviser are sitting on the same side of the table,” Hopkins said. “And that’s ultimately a very good thing.”
“One (thing) advisers are going to have to do is show their value for their fee.” Jamie Hopkins, American College of Financial Services