**As seen on Forbes**
Frank Armstrong, III
The Labor Department (DOL) took action because the Securities Exchange Commission (SEC) wouldn’t. So, today we have Fiduciary Light from DOL.
I’ll admit, even though billions of dollars are at stake, there is no better way to put an audience to sleep than to explain the difference between fiduciaries and sales people. But, this is important and easy. So, try to hang in there with me.
What’s a Fiduciary?
A fiduciary works for you and must act in your exclusive best interest. That’s pretty simple, right? The fiduciary standard is the highest standard of care for investors. We have had fiduciaries since the knights ran off to the Crusades and left a caretaker in charge of their holdings. A large body of law over 1000 years dictates the standard. We know what fiduciaries are supposed to do.
What’s a Salesman?
On the other hand, a salesman is employed by a company to sell stuff to you. In the case of security and insurance salesmen the fiduciary standard does not apply. They are held to a much lower standard of “suitability”. In plain English that means that unless the transaction is bad enough to gag a maggot, it’s OK. Buyer Beware!
What’s the problem?
A few examples: It’s OK to recommend the most expensive mutual fund with the highest commission to you without disclosing that better and cheaper alternatives might be a better solution. It’s also OK to recommend a bond that the parent company wants to get rid of, or where they are participating in an underwriting, or a product where the parent company has enhanced incentives to push. None of this is in your best interest. That’s pretty simple, too. Right?
Fiduciaries must disclose all the relevant costs and any potential or real conflicts of interest. Sales people need not. That’s pretty simple, too. Right?
Who is a Fiducairy?
So, who is a fiduciary? A firm registered solely as an SEC Registered Investment Advisor is a fiduciary all the time in every transaction and every recommendation. Very simple.
Who is not?
A stock broker, Registered Representative of a broker dealer, or Insurance salesman is not a fiduciary. Even though they masquerade as Advisors, Consultants, Vice Presidents, Financial Advisors or any of dozens of titles, you can reliably tell them by the FINRA designation on their cards and/or letterheads. Simple, Right?
The Grey Area
Now it gets tricky. If the that same person is dual registered as a registered representative (RR) and or an investment advisor representative (IAR) , you can never tell what role he/she is playing. They can and do change hats in an instant. During any dispute, either litigation or arbitration, their first line of defense is that they were not fiduciaries in the transaction.
Enter the DOL
The DOL got fed up watching pension participants be victimized by unscrupulous sales people. Abuses were plenty. As an example, salespeople induced people to leave a perfectly good pension plan to rollover into a much higher cost IRA to line their own pockets. IRAs were consistently stuffed with high cost investment options.
Because the SEC was simply AWOL on the issue DOL propagated their own fiduciary standards for pensions, IRAs and IRA rollovers. It is a step forward and will prevent a number of abuses. Unfortunately, the new regulations add a new layer of complexity and further confuse the line between fiduciaries and sales people. The list of exceptions to fiduciary requirements is enough to make your head spin. The SEC should have ruled, and they should have gone much further.
I’m not interested in a blanket smear. Let me be perfectly clear, there are plenty of very ethical professional stock brokers and registered representatives. And there are reasons why you might want to do a transaction with a stock broker or registered representative. For instance, if you wake up inspired to sell your Ford stock and buy GM, you don’t need fiduciary advice.
Also, let’s be clear that not every Investment Advisor is pure as the driven snow, or even particularly bright. There is no guarantee of competence or integrity that comes with the Registered Investment Advisor designation. So, while they are held to dramatically higher standards by law you must still choose carefully.
What to do?
If you need financial planning advice beyond a simple self-directed transaction, you ought to have a fiduciary that’s looking out for you. And, a firm solely registered as a Registered Investment Advisor must ALWAYS act solely in your best interest. It works for pensions, pension rollovers, IRAs and all of your other accounts. That’s pretty simple.
On the other hand, the DOL Fiduciary Light doesn’t quite cut it, and it’s not simple.
Disclaimer: My firm is a solely SEC Registered Investment Advisor