Posted on May 27, 2021 in

Understand Your Advisor | Fiduciaries Matter

Earlier this year the Biden Administration announced that Trump-era changes to the way investment advice is regulated would be allowed to take effect. This decision surprised many observers who expected the new rules to be revisited, and more stringent standards set.

In 2019 the Securities and Exchange Commission adopted new rules regulating investment advice. The new rules, called Regulation Best Interest, took effect last summer. The Department of Labor proposed its own rules to regulate investment advice in retirement plans in December. Unfortunately for consumers, both sets of rules contain loopholes and allow product sales under the guise of “financial advice”.

Under the new rules, brokers can continue offering products that aren’t necessarily the best thing for the client. The “best interest” regulations don’t apply to so-called “insurance only” advisors who are only licensed to sell life insurance and annuities. The practice of “Dual registration” continues to be permitted. Brokers who primarily sell products will still be allowed to claim to offer a “fiduciary-like” experience.

Fiduciaries Matter More Now Than Ever

Most financial advisors are licensed based on the kinds of products they sell, not the advice they offer or services they provide. Advisors with licenses to sell insurance products, or as a registered representative of a broker, are not required to put your interests first when offering you a product or giving you advice.

The gold standard of advice is called the “fiduciary standard”. A fiduciary is someone who has a legal obligation to put your interests ahead of their own. If someone is your fiduciary, it means they owe you a special duty of loyalty and cannot do things to enrich themselves or others at your expense.

Registered Investment Advisors are required by law to be fiduciaries. Certified Public Accountants are also required to be fiduciaries. Most other of financial advisors are not required to be fiduciaries. Brokers, bankers, and insurance salespeople all operate under less strict standards. Many could not be fiduciaries even if they want to, because they are employed to sell products to generate commissions. Some of these “fake fiduciaries” work hard to present the image of working in your interest, even though they have no legal obligation to do so.

Regulatory loopholes put your retirement at risk. Choose your advisors wisely!

Loopholes that enable product sales under the guise of financial advice also found their way into the SECURE Act. Employers can avoid much of their responsibility as fiduciaries if they allow insurance companies to sell products inside their retirement plans. If you are participating in a retirement plan at work, take care to understand what you are investing in! Savers who don’t pay close attention could find themselves pushed into expensive investment options.

Fortunately, consumers are not completely left out in the cold by these new regulations. The SEC requires advisors to provide a document called “Form CRS” which helps consumers understand how their advisor is paid. You should also take the time to research an advisor before you hire them. Understand your advisor’s credentials and what regulator(s) they answer to. Ask them how they are compensated, and whether they operate exclusively as a fiduciary.

Everyone says they have your best interest at heart. A true fiduciary will put it in their contract. The only way to be sure you are getting the best possible advice is to be sure you hire an advisor who has only one hat. Make sure your advisor delivers investment advice exclusively as a fiduciary Registered Investment Advisor.

Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer