What the fiduciary rule means to us

Update on February 8, 2017: District Court in Texas upheld the fiduciary rule in this 81 page ruling in a case brought by the financial services industry groups. The court ruling seems to praise the new rule. Except in the unlikely event of very fast action by the Department of Labor it appears that the fiduciary rule will go into effect in April 2017.

On Friday February 3 President Trump signed a memorandum reportedly(1) ordering a delay and review that would lead to the eventual removal of a “best interest” standard of care from financial advisers who serve individual retirement plan investors. That expected action is consistent with Trump’s campaign promises to Wall Street firms. The law known as the “fiduciary rule” was supposed to go into effect this April after 5 1/2 years of public debate and hearings. We expected that the rule is unlikely to play any role in protecting investment plan participants according to Trump’s stated intentions. Wall Street cheered the move on Friday. Consumer advocates generally mourned. The biggest headline news in retail financial service regulation in this decade is now on the rocks.

This week marks 30 years since I left a Wall Street firm to work as an independent financial adviser. Over those years I have witnessed many abuses stemming from greed in the financial product sales process. In fact this was the primary driver in my decision to leave Wall Street. I have come to recognize that retirement plan investors do not have the wherewithal to decipher and navigate the complex financial product and tax details in today’s investment world dominated by highly trained financial services sales representatives with the title “advisor”. I’ve seen dozens of hard-working 401(k) plan participants, for example, suffer losses of tens of thousands of dollars retirement plan income because they listened to the advice of a sales representative that was not in their best interest. Based on my experience, I was disappointed by the president’s decision.

The only lasting effect of this whole chapter of retail financial service history – a process that took the financial industry years to develop and took the president only moments to crush – is that individual investors and employers might be more aware now that financial services firms are not required to act solely in the investor’s best interest.

What can we do now to avoid abusive tactics that harm investors? Adopting a few simple rules might help in the future:

  1. Do not accept investment and financial advice solely from the same firm being paid to handle the retirement plan account.
  2. Have at least one independent adviser you hire and pay directly yourself who is not affiliated with your account and is not paid based on commissions or built-in investment fees.
  3. Recognize that the most damaging decisions are made during a roll-out or roll-over of retirement plan assets in an IRA. Be especially careful then.
  4. Get tax advice in writing before signing for an investment plan change, particularly a roll-out from a retirement plan.
  5. Employers can make it easier for employees to get an independent opinion simply by inviting independent advisers to have access to employees through company newsletters, web site and lunchtime seminars.

As a CPA with a history as an independent Registered Investment Adviser, I am strongly biased in my opinions as to the quality of advice that investors should seek. Some say that my standards are too high and unrealistic for the mass of retirement plan investors. But I welcome the opportunity to speak with anyone who feels that they have not received the best advice from a commission=based financial services firm. I have been successful in helping individuals recover from a bad experience with a financial services firm. Sometimes the firm can be pressured to address a grievance after an investor takes appropriate steps. Recognizing the problem and discussing options to correct this type of abuse is the first step toward a better financial future.

(1) Late-breaking news in the hour before this blog was published shows that the wording in the version of the memorandum signed by the president on Friday does not actually delay implementation of the fiduciary rule. This memorandum differs from the original proposed memorandum circulated to the press (see OriginalTrumpFiduciaryMemo and note that Section 1 (c) is removed). It is not known if this change is a technical error by the Trump administration or whether the administration is backing away from its campaign promise to delay and repeal the fiduciary rule. We do not know if Trump will issue any followup or corrective action. We do know that the financial services industry and the press expected Trump to overturn the Department of Labor’s rule. This memorandum appears to have no authority to delay or cancel the rule other than to require the Department of Labor to review the matter. It now appears that the entire financial industry and the press (like this article in Forbes) got this story wrong. Yet the underlying message of my blog post remains appropriate, so the post stands.

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