If you are not familiar with this term–you should be, and you soon will be thanks to the Department of Labor. Currently, the DOL is proposing a new standard for financial advisors. If the bill passes, advisors working with clients on retirement accounts (IRAs, 401(k)s, etc.) will be held to a higher standard of being a fiduciary; the “Fiduciary Standard” requires advisors to put their clients’ interest first, which I’m sure most investors would assume is the status quo.
However, the current “Suitability Standard”, which most advisors are currently held to, only requires advisors to recommend suitable investments to clients. The flaw with the “Suitability Standard” is “suitable” is a vague definition; it allows for conflicts of interests, recommendations that aren’t always in the clients’ best interest, and influence on advisors from their employers. The “Fiduciary Standard” will overhaul the industry, eliminate conflicts of interest, and force advisors to place the clients’ interests first. This will be a good change, despite what some politicians whose only connections to the financial industry are the contributions they receive from the firms who have the most to lose, are saying (I’m talking about you, Paul Ryan.)
Not all financial advisors will be impacted by the change in standards, though. Some firms, established as Registered Investment Advisors (RIAs), are already held to the “Fiduciary Standard”. When I decided to start my own firm, there was no question that I was going to set it up as a RIA; I did not want my clients, or prospects to ever question my recommendations for them. I wanted my firm’s success to come from taking care of my clients, not from the companies I was recommending. This is not to say that an advisor cannot put their clients’ interest first under the “Suitability Standard”, but it is much harder. And the advisor may not realize how hard it really is, until he leaves that model behind…I speak from experience.
Rather than add another post about the DOL proposal to the blogosphere, I’ve highlighted a couple of articles and a podcast for those interested in learning more about the proposal, the potential changes for investors, and what you should be expecting from your financial advisor. Enjoy!
Masters In Business Podcast: An Interview with Ron Rhoades (a podcast for those too busy to read)
This post was brought to you with the help of The Notorious B.I.G.’s Greatest Hits; a no brainer for today. I often listen to music as I write, and I will provide my soundtrack on each post.
Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.