Do the Right Thing

For the sake of clarity, a fiduciary is a person in a position of authority whom the law obligates to act solely on behalf of the person he or she represents and in good faith. Unlike people in ordinary business relationships, fiduciaries may not seek personal benefit from their transactions with those they represent.

Spoiler Alert: AdvicePeriod is – and has always been – a fiduciary in every sense of the word.

When the typical person agrees to undergo a major operation, they can trust their surgeon to do his very best. When they sue over an injustice, they can presume that their lawyer will vigorously represent their interests.

Amazingly though, the majority of financial advisors have never had a professional or legal obligation to act in their clients’ best interests. Stockbrokers and insurance brokers operate under business models that frequently pit their own profits against their clients’ best interests.

That’s why the Department of Labor’s (DOL) fiduciary rule, issued just a few weeks ago, is a big deal. For the first time, all advisors will have to act in clients’ best interests when dealing with their retirement accounts. Sounds like a great development for consumers, right? Well, not exactly.

The financial advice industry has long been divided between brokers—literally, investment and insurance salespeople—and fiduciary advisors, like AdvicePeriod, who have a legal obligation to put clients’ interests first. In Wall Street’s sales culture, brokers have made careers of steering clients into mediocre products that pay high sales commissions.

Six years ago, the DOL started developing regulations to change this absurd state of affairs. During that time, it faced tooth-and-nail resistance from the brokerage and insurance industries, who were determined to protect their profit machine.

As a result of the industry’s relentless lobbying, the DOL ultimately delivered a compromise-filled rule that, in many ways, still favors Wall Street over consumers. Consider the following:

1. The rule only pertains to 401(k) plans and IRAs. It does not apply to taxable investment accounts, a huge part of the market. It doesn’t even apply to all kinds of retirement accounts: The 403(b) plans often used by teachers and others aren’t covered because they’re not under DOL jurisdiction.

2. It lets brokers keep charging sales commissions. The compensation structures that are at the heart of Wall Street’s conflicts of interest will, incredibly, remain in place. The fig leaf: Brokers will have to provide a contract promising to put a client’s interests first.

3. It still allows brokers to recommend awful products. Brokers can continue to steer clients toward absurdly expensive annuities, non-traded REITs and mutual funds—as long as they provide the aforementioned contract. No true fiduciary would be willing to do this.

4. Pushing in-house products is still OK. Wall Street firms make a ton of money in management fees on proprietary products, and their brokerage armies will still be allowed to steer clients toward those products. If this isn’t a conflict of interest, we’re not sure what is

5. It lets Wall Street bury consumers in legalese. The DOL’s fiduciary rule requires advisers to direct clients to “information on the fees charged.” The leaves the door open for obfuscation and murkiness. A brokerage firm could, for instance, disclose how a client’s fees and expenses were calculated—rather than exactly what those fees amount to!
6. The rule doesn’t fully take effect until 2017. Should you have to wait a year for your advisor to start doing the right thing?

If there’s an overarching problem with the new fiduciary rule, it’s that it forces Wall Street to attempt to do the right thing by putting a regulatory gun to its head. And that may be the main difference between true fiduciary advisors and the rest. AdvicePeriod and our fiduciary peers choose not only to operate under the fiduciary standard, but to act as fiduciaries as defined above, because we believe that our clients deserve nothing less.

True fiduciaries don’t treat retirement accounts and taxable accounts differently. We provide advice that is in clients’ best interests, without a hidden agenda. We recommend the best, lowest-cost solutions for their needs, and we never push proprietary products. Finally, we’re clear and transparent: Our clients know exactly what they’re paying, and what they’re getting in return.

Fiduciaries like AdvicePeriod have true, client-centered fiduciary cultures. And that’s something that no government rule can create.

Disclosures:

The information provided is for educational purposes only and is not intended to be, and should not be construed as investment, legal or tax advice. The information is subject to change and, although based upon information that AdvicePeriod considers reliable, is not guaranteed as to its accuracy or completeness. AdvicePeriod makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information.

In accordance with Treasury Regulations Circular 230, any tax discussions contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein.

Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. In preparing this article, we have relied upon information provided by third parties. While we believe these sources to be reliable, the accuracy and completeness of the information is not guaranteed. We have provided performance results of certain indices for comparison purposes only. A description of each index is available from us upon request. The historical performance results of each index do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index.

AdvicePeriod, LLC (“AdvicePeriod”) is an SEC registered investment adviser with its principal place of business in the State of California. Any reference to the terms “registered investment adviser” or “registered,” do not imply that AdvicePeriod or any person associated with AdvicePeriod has achieved a certain level of skill or training. AdvicePeriod and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which AdvicePeriod maintains clients. AdvicePeriod may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from registration/notice filing requirements. This article is limited to the dissemination of general information pertaining to its investment advisory services. Any subsequent, direct communication by AdvicePeriod with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of AdvicePeriod, please contact AdvicePeriod or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).

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