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US Department of Labor issued its final rule: Fiduciary Standards

Ashley Copp, CFA, Wealth Management Advisor | Cole Hansen, Wealth Management Associate | May 12, 2016

The US Department of Labor (DOL) issued its final rule regarding the conflict of interest and fiduciary rules for personal retirement accounts on April 6th 2016. This has been a heavily debated topic in the investment community in recent years with the ultimate goal of improving the standard of advice within the financial industry. The DOL’s ruling addresses the personal retirement account space, updating an outdated framework regarding conflicts of interest and extending the fiduciary standard of care to financial professionals throughout the industry who were previously held to the suitability standard.

How does this apply to Weatherly and our clients?

Weatherly is a comprehensive wealth management firm registered with the Securities and Exchange Commission and defined as a registered investment advisor (RIA). We have been held to the Fiduciary standard of care since the inception of the firm in 1994 and strive to deliver the highest quality of investment advice to our clients while upholding the fiduciary standard. Although the new guidelines do not directly impact Weatherly and how we work with clients, the new ruling does have a significant impact on the industry overall increasing quality and accountability.

Fiduciary Standard vs. the Suitability Standard

The fiduciary standard of care, established under the Investment Advisors Act of 1940, applies to advisors/wealth managers registered with the Securities and Exchange Commission or state regulators. The standard holds advisors to a duty of loyalty and care, which requires financial professionals to act in the best interest of clients at all times. Advisors must obtain complete and accurate information before delivering investment advice. In addition, advisors must avoid conflicts of interest and disclose potential conflicts to clients prior to providing investment advice. Lastly, a fiduciary must also apply a best execution standard when completing transactions on behalf of a client, which requires both low cost and efficient execution.

The suitability standard is much different in scope, this standard applies to financial professionals registered with the Financial Industry Regulatory Authority (FINRA) – including broker dealers, insurance professionals, investment salesperson etc. The suitability obligation dictates that the professional must only reasonably believe that a recommendation is suitable for the client and is in their best interest. The professional is not responsible for monitoring an investment after the initial purchase, having complete and accurate information regarding the clients overall financial situation, or operating with a duty of loyalty to the client. Investments can be suitable for a client but inferior in quality to other investment offerings of similar nature.

Additional information here:

http://www.investopedia.com/articles/professionaleducation/11/suitability-fiduciary-standards.asp
http://financialplanningcoalition.com/issues/fiduciary-standard-of-care/
http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2015/03/19/is-your-financial-advisor-a-fiduciary

DOL Fiduciary Standard Rule

  • Financial professionals providing advice to retirement plans or IRA account holders under the Employee Retirement Income Security Act (ERISA) will now be held to the fiduciary standard. Actions that require the fiduciary standard of care going forward include:
    • Recommendation of investment allocation to a plan sponsor
    • Advice regarding a specific investment option to a plan participant
    • Any recommendation of IRA product options – including a rollover from a qualified plan to an IRA
    • Referrals to an advisor or advisory service
  • Planners, wealth managers, advisors and professionals delivering advice must adhere to the fiduciary standard and disclose any conflict or potential conflict of interest to plan participants. Failure can expose professionals and employers to lawsuits and ERISA penalties.
  • Phased in over time – the rule is applicable to ERISA retirement plans and IRAs beginning in April 2017.

Additional information here:

https://blogs.cfainstitute.org/marketintegrity/2016/04/07/dol-fiduciary-rule-though-complex-it-moves-investment-advice-model-in-right-direction/
https://www.dol.gov/ebsa/newsroom/fsconflictsofinterest.html
http://www.employeebenefitadviser.com/news/dol-fiduciary-ruling-may-have-more-significant-impact-than-advisers-initially-thought-study-finds

We will continue to monitor developments from the DOL and possible changes to the industry landscape.

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.