Big Changes in the Financial Industry: Fiduciary Rule Update

August 30, 2016

Big changes are coming in the financial services industry.  The Department of Labor has finally issued new regulations that will make some of the most significant changes in decades to the way that brokers interact with the American public.   These new rules, commonly referred to as the ‘Fiduciary Rule’, expand the universe of advisors that will be held to a “Fiduciary Standard”.  We’ve written about the preliminary Department of Labor Fiduciary rules in the past.  Here is a quick update now that the final rules have been released.

 

The final rules require anyone providing investment advice to retirement investors to be held to the Fiduciary Standard beginning April of 2017.  The Fiduciary has two very important duties.  The first is the duty of loyalty.  The duty of loyalty requires the Advisor to be ‘loyal’ to the client, putting the interest of the client first.  Are you surprised that this isn’t already the rule?  Many, including us, believe that it is common sense.  We at Cedarstone Advisors have been held to a Fiduciary Standard from the very beginning.  Yet, doing what is in the best interest of the client is not yet the legal standard for the majority of brokers in practice, which is perhaps why the financial services industry has such a significant trust issue (learn more here).   How are brokers who sell on commission going to show that they are putting their client first?  I have no idea, and the brokerage industry is scrambling to figure out how to keep doing business once the rule is effective.

 

The second duty of the Fiduciary is to be ‘Prudent’.  To establish that the investment advice given was prudent, an advisor must follow certain guidelines, including understanding the client’s objectives and risk tolerance, and provide analysis to support the recommendation.  Again, you may be stunned that this was not required under the old rules.  Advisors will no longer be able to offer canned solutions to clients without really doing the work to understand the client’s needs.  Again, we believe that this is common sense and have always held a belief that we must first understand our client in order to invest appropriately.

 

There are more than one thousand pages to the new Department of Labor rules, but it is really these concepts that are the core of the new rules.  We applaud the new rules and believe that they will be a significant benefit to the American consumer and the Financial Services Industry.  Moreover, we are proud that our business model has held us to a Fiduciary Standard from the inception of the firm.   If you are unsure if your current advisor is a Fiduciary simply ask.  If you would like independent advice from a firm that is already held to a Fiduciary Standard, give us a call.

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