The new fiduciary rule – Washington has your best interest on this one… no, REALLY.
What has been poorly communicated to employers, in our opinion, is why this issue should be important to you and other plan providers. Here is the basic, albeit slightly oversimplified, reason this is a big deal and why it should be to you:
Best Interest vs. Suitability
A fiduciary is defined on legal-dictionary.com as:
An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit. Click for full text.
An advisor acting as a fiduciary is legally obligated to act solely in the best interest of their client. A fundamental part of being a fiduciary is removing as many conflicts of interest as you can, and fully disclosing those that are inherent. In most cases advisors that are compensated on commission, commonly called brokers or reps, do not, cannot or will not sign on as fiduciaries to their clients. The standard that they are legally held to is called suitability. It is a significantly looser standard that only requires them to sell products and services that are suitable for their clients.
An example:
If a client is looking for a mutual fund or ETF in their portfolio that holds large US company stocks, there are literally hundreds of products out there that reasonably fit that description. A broker could sell the client a fund in the U.S. large-cap category which is a poor performer, with high internal expenses which pays the broker a higher commission than better performing, less expensive choices and still be well within the definition of suitability. An advisor acting in a fiduciary capacity would have to ensure the recommended fund is in the client’s best interest first; how much compensation is in it for the advisor has nothing to do with the fund being good for the client.
We are not suggesting that all brokers out there are making 401k recommendations solely on how much is in it for them. However, given that it is the way they often get compensated, the amount of commission a fund will pay them naturally has to be part of their equation. They are not doing it for free and neither is an advisor working as a fiduciary. The difference is the fiduciary advisor typically gets paid on a fee basis that is revenue neutral; or to put it another way, the compensation they receive is not affected by the selection of one product, brand or solution over another. This removes the issue of compensation as a potential conflict of interest.
How is Washington on my side?
The new rule will ensure all 401k plan advisors, including brokers, are held to a fiduciary standard with respect to the plans they work with. Clearly this would upset the apple cart for huge numbers of brokers out there, many of whom will not be able to make that commitment because of the parent company or broker-dealer they work for. The DOL has essentially maintained, under intense lobbying pressure, that having 401k plan advisors acting solely in the best interest of their 401k clients is going to be non-negotiable. In short, we believe there are some substantial changes on the horizon for advisors and brokers who are working under the current “suitability” guidelines.
For those of us who are already working in a fiduciary capacity to the employers and participants we work with, this all seems a bit self-evident. It serves as reinforcement to what we have believed all along – acting in our clients’ best interest and putting their needs before our own is in everyone’s best interest.