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.
There’s a tremendous amount of debate in the financial industry about the US Department of Labor’s proposed Fiduciary Rule, but very few clients understand what’s at stake if the new rule takes effect (or worse, if the rule is scrapped).
Here’s what the rule is about, in plain English, and why we fully support it (and also why we voluntarily chose to act as a Fiduciary for every client, from your first invested dollar):
What is this rule all about?
The Fiduciary Rule was originally proposed in language in the Dodd-Frank Act of 2010. This act was placed into law following the deep economic and market recession that began in late 2007 and reached its bottom in March of 2009. It is intended to require the companies and agents who manage your retirement accounts to act as your fiduciary (that is, essentially, to manage your money with the same care and concern as if it were their own).
What specifically does the rule require?
The current Rule language is over 1,000 pages long, but it boils down to three basic requirements of any advisor, agent, or investment firm who manages retirement accounts in the U.S.:
1. To clearly and transparently tell you, the client, all of the costs and fees related to the investments or insurance products you buy in a retirement account. They need to do so in plain English and using actual dollars.
For example, many retail mutual funds carry a variety of expenses, including front- or back-end (“surrender”) charges, annual management and trading costs, and marketing (12b-1) fees. All of these costs are paid for either directly by your account, or are deducted from the investment returns of the fund. The total fund fees can be very low, like 0.10%, or very high, as much as 3% or more. Plus, many annuities have those same fund fees plus an additional 1.5% – 2.5% yearly in adminstrative charges. Over many years, those excessive fees can cost an investor tens if not hundreds of thousands of dollars. Here’s a quick example (these and other calculators can be found on our free financial resource site, nvestacademy.com):
Let’s say you have $25,000 in your 401k, and are contributing $1000 per month and have 20 years until you retire. Let’s say your investment strategy earns an average of 7.5% per year before any fees.
Without fees, your investment would grow to $665,251, but adding just 1% in fees (and therefore earning a net return of 6.5%), would cost you $83,419 of your potential return over 20 years. Having 2% total fees (dropping your net return to 5.5%) would cost you $154,708 in lost investment return!
Of course, every investment has fees and expenses associated with it, but many times, those costs aren’t clearly explained to you. The new DOL Rule would require firms and agents to do so, in plain language and in actual dollars.
2) To clearly and in plain English inform you of any conflicts of interest your advisor or investment firm has in any of the products or investments they recommend that you buy.
For example, many firms use their own proprietary mutual funds in client accounts, but also charge you up-front sales charges or investment advisory fees. You may not know that your company is, in effect, earning money twice on the same investment products; the rule would require them to inform you.
Another example is that your investment firm may have exclusive revenue sharing agreements with some of the investments they recommend, or your advisor or agent may be compensated more for selling one product over another. Although there may be nothing wrong with the product or investment itself, the fact that the investment company or your advisor may make more money selling you one product over another is a conflict of interest, because there is financial incentive to put clients into one product over another. The Department of Labor Fiduciary Rule does not force agents or companies to eliminate their conflicts of interest, but simply requires them to tell you about them before you buy what they are offering.
3) To always place your best interests ahead of their own. This is, surprisingly, the part many insurance companies and investment firms have the biggest problem with.
Right now, most insurance agents and investment representatives are paid a commission when you buy or sell an investment product. They are, essentially, paid only to move money. They are not paid to grow it or manage it per se, just when they can trigger a transaction of some sort. And because it’s simply a transaction they are being paid for, not ongoing service, the ethical standard these reps are held to is called the “Suitability Standard“. This standard simply tells them that the product they sell you must be generally suitable to someone of your age, income, and risk tolerance. It does NOT have to be a product that actually serves your best interests, just that it’s typically okay for someone like you.
The standard the DOL Rule wants to implement would require these same agents and firms to instead act as your fiduciary – your “stand-in” and advocate. The Fiduciary standard is a much higher ethical standard of care. It’s what we at nVest Advisors, and all other fee-only investment advisory firms volunteered to be held to as part of our business model. The insurance and investment world at large, however, is fighting it. They do not want to be fiduciaries. Think about that: in opposing the DOL Rule, to the point of lawsuits, the insurance and investment industries strenuously do not want to be forced to place your best interests ahead of their own.
And why not? Well, because placing your interests first would mean companies would have to either be prepared to justify high-commission products, or else use less expensive investments (like index funds or ETFs in retirement accounts instead of full-price mutual funds). Using lower cost products hurts profits. It would also mean your agent would have to be able to prove that making frequent investment changes in your account – that generate new commissons for him or her – was always in your best interest. It would mean that your agent and their firm would have to treat your money like they do their own at all times – with great care and diligence, being sensitive to fees and expenses, and actively managing it for market conditions
It’s just not something most of the industry is equipped to do. The entire investment and insurance industry was built on the commission-per-transaction model. Growing the account balance is nice, but it doesn’t help this month’s production quota. No, the only thing that keeps the commission rep in a job is finding another pile of money to move around.
Is my agent or advisor a fiduciary?
All firms that take a fee directly from you or your account to provide investment and financial planning are required by law to act as a fiduciary. Agents or reps who sell you a product, like a stock or bond, mutual fund, insurance policy or annuity, are most likely NOT fiduciaries. A few reps carry both designations (these are called Hybrid Advisors in the industry), and can earn either a fee or a commission.
When you aren’t sure, ask them. Ask if they and their firm are fiduciaries (not in spirit, but in the regulatory definition). If you get a hesitant or obscure answer, ask for it in writing.
Is nVest Advisors a fiduciary?
Yes, 100%. For every client, from your first dollar invested on your first day, we are full fiduciaries of our client accounts.
So, if my advisor earns commission, they can’t be fiduciaries?
Not necessarily. There are many good reps and agents out there who work on commission, who really do their best to put their clients’ best interests first. What we’re saying is that if there are commissions involved, the industry regulators don’t yet require that they act as fiduciaries. The DOL Rule is attempting to correct that, at least with retirement accounts.
We don’t take issue with individual reps or try to judge the hearts of any other advisors when we take a strong stand in favor of the fiduciary rule. We do take issue, however, with the financial services industry itself, which for generations has structured the products they sell you, and the compensation and production requirements of their agents, in ways that consistently benefit the industry over the investor.
Which companies are fighting this Rule?
Nearly all commission-based investment firms have come out against the changes proposed by the Fiduciary Rule, but only a few are trying to directly stop the rule’s implementation, for obvious reasons. No firm wants its name to be publicized as going to court to stop from being forced to put its customer’s interests first.
But these companies join and fund several associations and trade groups, like the US Chamber of Commerce, and those umbrella groups are suing the Department of Labor in court to stop the new rule, and are lobbying Congress to pass laws either muting the rule, or eliminating it entirely.
We believe this is foolish. Times are changing. Investment costs are coming down, investors have many more options to put their money (including many very low-cost automated services), and we have access to investment markets and research like never before in history. So the firms that stand opposed to the fiduciary rule may win a few battles along the way, but they will lose the war. The industry has been trending toward lower cost, more responsible and ethical management of client money for the past 20 or so years, and we believe the move toward a fiduciary standard for all investment accounts is not far away.
The DOL Rule isn’t perfect; no human endeavor ever is. But it is a significant step in the right direction.
Where does the rule stand now?
The Department of Labor just issued a notice that they will delay implementation of the rule until at least early June 2017, due in large part to pressure coming from the investment and insurance industry lobbyists.
Will you keep me informed of this rule?
Absolutely! Join our mailing list and we’ll keep you up-to-date on this and many other investment and financial topics.
I’d to talk to someone at nVest about my investments.
We’d be happy to. With no sales pressure or obligations. We promise. Give us a call at 888-852-0702 today, or schedule a phone or video appointment now.