by Deidra Krys-Rusoff Senior Vice President
If you Google the word, “fiduciary,” you will find that the definition states, “involving trust.” As a fiduciary of your investments, you should expect your investment adviser to put your interests before theirs when it comes to advice and selection of investment strategies. For many institutions, this has not always been the case, particularly when it comes to compensation and fees.
After six years of finagling, The United States Department of Labor (DOL) stepped into the security markets this week with new rules that change the standards of care, conflicts of interest and investment advice for retirement accounts. According to the DOL’s fact sheet on the proposed rule, conflicts of interest cost American families “about 1-percentage-point in annual returns on retirement savings totaling $17 billion every year.” The current rule allows brokers to offer investments that fit a client’s needs and risk tolerance at the time of the sale, while emphasizing their own company’s products (and perhaps earn a higher sales commission or fee). The new rule will require retirement advisers to abide by a fiduciary standard of care, meaning that all brokers and advisers must put their retirement clients’ best interests ahead of their own. The rules are scheduled to go into effect in April of 2017.
What effects does this have on the securities industry? It does not directly impact registered investment advisers, like Ferguson Wellman and West Bearing since RIAs have always been held to a higher, fiduciary standard of care. However, it could have a large impact upon traditional broker-dealers, insurance agents and other financial advisers who will need to change (or at least disclose) how they are compensated.
New business practices will need to be established and new contracts developed to comply with the DOL regulation. Researching and complying with the regulations will require considerable time and money and likely will change the operations of many financial institutions.
Opponents of the rules change state that these regulatory hurdles will increase the management costs to prohibitively high levels for small accounts. Proponents claim that the new rule may weed out advisors who currently are not acting in their clients best interests and consequently will serve to provide a better investment product for all retirement plans.
We welcome this change to the broader components of our industry and certainly would have preferred that it occurred proactively rather than from a government ruling. There will be no impact of this ruling for Ferguson Wellman and West Bearing clients beyond a greater understanding of the fiduciary role that our firm has played since inception.