Op-Ed: A Retirement Advice Rule Worth Saving

On February 3, the new administration signed a memorandum directing the U.S. Department of Labor (DOL) to review its Fiduciary Rule scheduled to go into effect on April 10. This action may cause the rule, which is crafted to support Americans in their retirement savings, to be delayed, amended or repealed.

Put simply, the rule states that all Americans must receive unbiased financial advice for their retirement accounts by requiring all financial advisors to act solely in the best interest of their clients.

Investors may be surprised to learn that not every financial advisor must act in their best interest. Now – and in the future if the rule is delayed or repealed – some advisors are not and will continue to not be obligated by law to serve in the best interest of their clients.

There are two distinct sets of standards for financial advisors. Non-fiduciary advisors, for example those at large brokerage houses, are held to a “suitability” standard, which only requires them to make investment recommendations to their clients that are deemed “suitable.” This lower standard allows them to recommend investments paying higher commissions rather than similar investments with lower commissions, without having to let their clients know. In fact, American investors lose $17 billion annually from non-fiduciary advice, according to the President’s Council of Economic Advisers.

Fiduciary advisors, on the other hand, are registered investment advisors required by law to follow a higher standard of responsibility. They have a responsibility to always act in the best interest of their clients. By mandate, they must align their interests with those of their clients and provide full transparency, thereby preventing conflicts of interest.

Unfortunately many people do not know about, much less understand, this distinction among advisors. But thanks to the efforts of the Department of Labor, this distinction is finally beginning to receive the attention it deserves.

The creation of the Fiduciary Rule does away with this distinction by requiring all advisors, when providing retirement advice, to align their interests with those of their clients.

This rule offers many benefits to retirement savers. For example, it puts advisors currently held to the suitability standard on the same side as their clients, where the registered investment advisor has always been. All retirement investors can then rest easy knowing that their financial professionals are recommending unbiased solutions.

Additionally, and perhaps more important, the rule likely will improve the long-term performance of retirement accounts. Lower commissions should result in improved returns year over year, especially when accounting for the effects of compounding.

The Fiduciary Rule is a consumer-friendly law that protects the retirement investor. However, it could even be argued that it does not go far enough and should require that all financial advisors be fiduciaries on all accounts, not just retirement accounts.

Nevertheless, the Fiduciary Rule is a step in the right direction toward replacing conflicted financial advice with unbiased financial advice. The Fiduciary Rule must be saved so that Americans can save better for retirement.

Sam Hubbard, MBA, CFA, CDFA is founder and managing director of Coastal Capital Management LLC, a registered investment advisor in Savannah, Georgia.


This article was published in the Savannah Morning News. To see this article click here.