“You can wheel and deal the best of them … And steal it from the rest of them … You know the score … their ethics are a bore.” — from “Mr. Businessman,” as performed by Ray Stevens
A recent Fifth Circuit Court ruling has overturned a 2016 Department of Labor rule requiring use of the fiduciary standard by financial advisors in managing investors’ retirement accounts. Based on this ruling, the U.S. Department of Labor will immediately cease enforcing the fiduciary rule passed two years ago. Thus, an investor's retirement account can now be managed by an advisor who is required to adhere only to the less stringent suitability standard and not the fiduciary standard. In other words, an investment can be recommended for a client as long as it is deemed suitable.
Imagine our local water company is providing a product that is less than pure, but meets minimum “suitability” standards as prescribed by local environmental regulators. Would we be satisfied? What consumer would not balk at such an arrangement? We all want the purest water available and, naturally, given a choice, we all would choose to work with an advisor who is required to serve our best interests and not their own.
We believe that all accounts, not just ERISA governed retirement accounts, should be managed according to the fiduciary standard. But the forces fighting against its uniform implementation have now gained the upper hand.
Several things could happen. The decision could be appealed. The SEC might offer its own fiduciary standard. A groundswell of public opinion could persuade the investment industry to voluntarily adopt the fiduciary standard. Or none of that might occur, and many investors might continue to work with advisors who are not required to adhere to the highest standard of client care in a “caveat emptor” scenario.
With the Fifth Circuit ruling, an advisor can sell or recommend products that are in his own best interests (and pay him a commission from a parent company) and not necessarily that of the client. That the investment vehicle may not be the best or most cost-efficient for the client is the price we pay for not operating under a fiduciary standard.
I remember overhearing an advisor at a conference years ago explaining why he could never consider leaving his parent company and serving as a fiduciary to his clients. "They sent my wife and me to Italy last year because of my annuity sales and for how many clients I placed in their mutual funds," he said. "Next year we're going to Alaska. I'd like to serve as a fiduciary, but we can't afford to give up free trips like these."
That advisor is compensated by his parent company and works for them, not for his clients. It’s hard to do both.
Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column "Arbor Outlook," is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.