- By definition, registered investment advisors (RIAs) are fiduciaries.
- RIAs have always been required to act in their client’s best interests—they don’t need government regulations to coerce them to do so.
- Low-cost and no-load funds can alleviate conflicts of interest when it comes to offering the soundest investment products to clients.
- In an industry with so many complex products, transparent pricing should be the rule.
Last Friday, President Trump signed an executive action asking the U.S. Department of Labor (DOL) to delay and consider rescinding its fiduciary rule that was scheduled to go into effect in April. The DOL’s fiduciary rule was established by the Obama administration in order to curb excessive and hidden fees that brokers and other financial service providers charge investors to take part in their funds, particularly for use in retirement accounts.
Requiring brokers to act in the “best interests” of their clients seems pretty reasonable, right? Haven’t they already been doing so? Not exactly. Under the current rules, as long as brokers are recommending “suitable” investments to their clients, they are covered and often times, the suitable investments earn brokers a higher commission than low-cost investments that are probably better for their clients.
As you can see by this industry thread, a rule designed to protect individual investors from excessive fees has provoked a firestorm of debate.
THE BOTTOM LINE
Many in Wall Street claimed it wasn’t all about commissions and that ultimately, the fiduciary rule would limit advice and products they can offer to low and middle income investors due to the added complexity and costs of complying with the fiduciary rule. I am very skeptical of that conclusion, especially considering the multitude of low-cost investments now available to consumers. Although any rule written which affects such a large and complex industry cannot be perfect, in the end, the rule is good for the industry and especially for individual investors.
THE IMPACT TO THE FIRM
All that said, the new rule, if passed, will have minimal effect on Soundmark Wealth, on our clients, and on the advice and investments that we provide. The same holds true if the fiduciary rule is overturned. Here are three important reasons why:
- Soundmark is an RIA (not a broker). As mentioned earlier, by law we are considered a fiduciary that has always been required to act in the best interests of our clients. Brokers, on the other hand, merely have to recommend investments that are “suitable” for their clients.
- We receive no compensation for the investment products we recommend to clients and therefore, have no conflict of interest in providing our clients with what we believe are the best investment options available.
- Our investment advisory fees have always been transparent and are clearly disclosed in our Investment Management Agreement.
UNDERSTANDING OUR CLIENTS
The focus of financial advice should not be on the product or the transaction; it should be on understanding what each client’s goals and needs are. Only then, can you provide sound solutions- investment or otherwise, that are in the best interests of the client. That is our focus at Soundmark. If you are unsure if you’re getting the best advice possible from your broker or another financial adviser, please feel free to contact us.
In my next post, we’ll look at how the proposed rule changes, if passed, would impact your 401(k)s.
Todd Flynn, CPA, CFP ® is a Principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other high-net-worth individuals to help them define their financial goals and implement an ongoing financial planning process.