I’ve always believed a universal fiduciary standard should exist for anyone who gives advice to others that can affect- and ruin -lives, whether it’s journalists, bankers, stock brokers, teachers or wedding planners. I don’t know why the fiduciary focus is strictly on finances. If you hold yourself out as an expert, you’d better not be faking it until you make it or, worse, have self serving or even malicious intent.
I want to pass on this 2 1/2 year old article by Shelby George, written when a universal financial fiduciary standard looked like a sure thing. Turns out Wall Street succeeded in killing it (Great PR move, Wall Street, fighting an initiative that puts your customers first).
I also want to emphasize this key phrase in her article, “The Fiduciary Rule puts a specific emphasis on the damage done by investor behaviors” whether self or advisor induced. It would have helped protect investors not only from inexperienced or dishonest advisors, it would have helped protect them from themselves! Virtually all of the big ripoffs of investors are catalyzed by investor greed, carelessness, unrealistic expectations and trusting without verifying. Even with a universal, well-enforced fiduciary standard, investors still need to do their due diligence by verifying the credentials and recommendations of their advisors.
The markets are an often overlooked key influencer. The current slow growth, low interest rate, long-term economic outlook creates new challenges for savers that were not a concern for the last generation of retirees. Fortunately, there has been an increased focus on savings as study after study finds that we need to save more for retirement than in previous years. Unfortunately, savings is only a part of the solution.
The Fiduciary Rule puts a specific emphasis on the damage done by investor behaviors and encourages new fiduciaries to pay particular attention to each investor’s unique risk tolerances and reactions to the markets as well as the investor’s long-term savings goals. In today’s market, where volatility is a “new normal,” it becomes critical for fiduciaries to frame investment due diligence and portfolio performance around the investor’s objectives rather than a hypothetical benchmark.
In the DOL’s own words1, the new rule will, “mitigate adviser conflicts and thereby improve plan and IRA investment results, while avoiding greater than necessary disruption of existing business practices.” However, certain compensation arrangements are viewed with heightened skepticism. In particular, the DOL application of ERISA’s self dealing prohibited transaction to all ERISA plans and IRA accounts will cause significant disruption to traditional brokerage models.
As the DOL encourages more level, transparent fee structures, fiduciaries must shift their focus to offering a service rather than selling an investment product. The value of the fiduciary’s services is based on the need of the investor.
ERISA class action litigation dates back to 1998 as an outgrowth of securities and class actions. Since that time, the volume and scope of the litigation has ballooned, especially when the stock market drops.
Recent 401(k) litigation demonstrates that no fiduciary decision is insignificant. IRA advisors are paying increasing attention to recent 401(k) fee litigation because of the DOL’s Best Interest Contract Exemption and the possibility of class action lawsuits.
With the new DOL Rule, advisors need to view each plan decision independently and have a repeatable and documented process for each. All processes should be designed to identify the needs of plan participants or the IRA holder and then make a recommendation based on that need. Each step of the process and the resulting recommendation should be documented with reasons given as to why the decision is in the best interest of the client.
To learn more about the three key influencers shaping fiduciary best practices and more on the DOL’s Fiduciary Rule, visit www.manning-napier.com/EvolutionaryFiduciary.
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