The Fiduciary Rule and Financial Advisors

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Most financial advisors are honest.

Some are not. They are the ones selling unnecessary product, churning accounts and ignoring blatant conflicts of interest just to make money. They are behind the horror stories of seniors being sold annuities that won’t pay for 30 years, of seniors whose savings are moved from a bond ladder to a risky real estate investment trust, of seniors who are sold long term care products that will never pay out.

It is ostensibly to target those few – the crooked, the greedy, the unscrupulous – that the Department of Labor crafted RIN 1210-AB32.   Unfortunately for the honest advisors, the broad scope of the Rule will force them, too, to add paperwork and disclosures to their practice.

Financial professionals are usually compensated by either a fee-based model (paid by the client), or by a commission/revenue sharing model (paid by the investment company, from extra fees charged to the client). It is easy for a client to understand and track the fee-based model. The problems arise with the commission/revenue sharing model: the sums received by the advisors do not currently have to be disclosed to the client. That incentivizes advisors to sell product that clients may not need.

To address this, the new Rule forbids commissions, revenue sharing, 12(b)1 fees and several other types of compensation unless the advisor, the financial institution and the client enter into a contract . The advisor must commit to a “best interests” standard that requires the advisor to act with the care, skill, prudence and diligence that a prudent person would exercise. The advisor must avoid misleading statements about fees and conflicts of interest. The client must be directed to a webpage disclosing the compensation arrangements.

The financial advisor would now have a fiduciary duty to the client.

The proposed Rule is getting quite a bit of push back from Congress and lobbyists. Where it will end up is anyone’s guess.