You have probably heard or read about the Department of Labor’s new rules requiring financial advisers of retirement savings plans — 401(k)s and IRAs — to adhere to the fiduciary standard.
Now, you would think the fiduciary standard of putting the client’s interest first with retirement savings — eliminating conflicts of interest and promoting transparency in all dealings — is good for everyone. You might think that, but you would be wrong. Registered investment advisers must meet the fiduciary standard. But much of the business, including stockbrokers and broker-dealers, are held to a less-rigorous gauge of behavior. Their advice must be “suitable” for clients, taking into account factors such as their age and their income.
The key difference boils down to this: A fiduciary standard requires professionals to steer clear of conflicts of interest to their clients or potential clients. The suitability standard only requires disclosing those conflicts of interest. As Michael Chamberlain, principal with the independent advisory firm Chamberlain Fiduciary Consultants, put it: “It boils down to one question. ‘Do I want the highest standard of care regarding my investment advice or retirement plan?’ If so, you want the Fiduciary Standard.”
The financial stakes are certainly high. According to the Investment Company Institute, at the end of 2015 total assets in 401(k)s totaled $6.7 trillion and in IRAs $7.3 trillion. Surveys consistently show that most people working with an adviser believe the professional acts solely in their best interest. In many cases that perception is false.
The effort to change that took a major step when the Labor Department recently issued a fiduciary standard rule involving retirement savings. The rule is supposed to go into effect in April 2017. However, the U.S. Chamber of Commerce and several other organizations filed a lawsuit on June 1 to block the change. The filers of the lawsuit want to keep the suitability standard system in place.
As I have written before in this column, what I find most disheartening about the lobbying and legal campaign against the fiduciary rule is that the standard is only a minimal safeguard. A fiduciary standard doesn’t guarantee professional competence.
People work hard to save for retirement. They deserve nothing less than that the professionals who advise them adhere to the fiduciary standard. In the meantime, if you plan on using an adviser, ask them: “Are you held to the fiduciary standard?”
Chris Farrell is senior economics contributor, “Marketplace,” and commentator, Minnesota Public Radio.