Beginning April 2017, the financial management of retirement accounts is going to get a bit more complicated. Thanks to a law passed by the U.S. Department of Labor this past April, financial advisors will now be required to live up to a mandated “fiduciary standard” when dealing with their client’s portfolios.
The new legislature came about as a result of a troublesome degree of flexibility in the current suitability standard, which only requires an investment asset be suitable enough to invest in, even if said asset comes with a litany of fees and won’t actually do much for a client’s portfolio. The new fiduciary standard requires the investment asset be both suitable enough to invest in and in the best interest of a given client’s portfolio. According to a press release issued by the white house press secretary, the conflicts of interest arising from the current suitability standard are costing Americans an estimated $17 billion annually and causing a 1% drop in annual returns on retirement savings.
In case you’re wondering how the DoL will go about making the judgement call on what qualifies an investment asset under the new standard, they’ve taken a little more than 1,000 pages to offer the full explanation of how brokers may stand to be liable in court, which will surely make for a relaxing bedtime read.
Assistance or Hindrance?
Although the policy seems like a straight forward altruistic endeavor, not everyone shares this opinion. According to Michael S. Piwowar, Commissioner of the Securities and Exchange Commission, this new fiduciary standard will actually be a disadvantage to lower and middle class families seeking retirement advice. He said in response to the passing of the rule:
“I am disappointed that the rule announced today seems to ignore the chorus of voices that questioned whether it will restrict middle-class families’ and minority communities’ access to professional financial advice by making retirement advice unaffordable. I am fearful that those concerns, which were widely and bipartisanly held, will prove to be true once the rule becomes effective.”
Most banks and brokerage firms have publicly supported the new standard, however, most likely since taking a stance which on the surface appears against their clients’ interests would be damaging to their public image. Other independent financial organizations are wary about the rule and have expressed uncertainty in regards to its potential effectiveness. Dale Brown, President and CEO of the Financial Services Institute, had this to say about the standard:
“As we have said since day one, there is no compelling evidence this rule is necessary to achieve a uniform fiduciary standard, and DOL’s own analysis fails to make the case. We will spend the coming days thoroughly analyzing this rule to determine if it protects Main Street investors by preserving their access to affordable, objective financial advice delivered by their chosen financial advisor.”
Whether or not their concerns are fully warranted remains to be seen but it is important to note that this new standard has been met with some serious dissension from key members of the industry.
A long time coming
As thorough as the policy is, it has made some serious concessions compared to the original proposal which was brought forward last April, 2015. For instance, the original draft included a list of investments which advisors were not even allowed to discuss with clients which has since been removed. Also, the new proposal tacked on the year-long grace period allowing brokers and advisors ample time to educate themselves and adjust to the new policy. You can read a list of everything which was changed from the original draft to the final version here.
As the industry shifts, as does the fintech which serves it, meaning this change could potentially spur a rapid increase in technological innovation in the industry in order to more proficiently adapt to the more rigorous standards. Anything from the way clients are on-boarded into the established system to the way model portfolios are created stands to be updated.
No matter how it all shakes out, it will be fascinating to see how the rule effects the industry as a whole. Regardless of your personal motive, leaving grey area of any kind can be a dangerous thing, but at the same time restricting financial advice to the point where the price is driven up beyond the average person’s means isn’t good for anyone. You can read the DoL’s official statements regarding the fiduciary standard here.