April 14, 2016
The Bull Session
A Changing Landscape
In the Spring of 2010 I was asked to speak to the Insights 2010 Conference sponsored by the Center for Fiduciary Studies. In my address I talked about the lack of understanding from investors on what had happened to their portfolios during the recession of 2008. Many investors lost much more than anyone had ever indicated was possible and the unexpected downside of taking risk launched a plethora of questions from investors who had, up to that point, believed that their investment professional was working in their best interest.
Much of the investing world was surprised to find out that they were taking more risk than their comfort zone would allow and everyone seemed surprised by the fact that most investment professionals did not have to adhere to a fiduciary standard when giving advice.
In my speech in 2010 I said that those of us who promoted a uniform fiduciary standard needed to work fast because the general public would forget about the importance of that standard as soon as we had a few years in a row of exceptional returns. I think I would have been correct if not for the Department of Labor (DOL). The DOL recognized that the general investing public was putting their trust in their advisers and that trust should be met with a code of conduct that matched investors’ expectations. It seems simple to say that investment advice should be given based on the best interest of the client. The problem comes in the form of understanding what our industry considers investment advice. The vast majority of professionals meeting with clients are not technically giving advice, they are making recommendations. When making a recommendation you are only required to meet a suitability standard of care which is much less stringent than a fiduciary standard. It allows the investment professional to think of the best interest of their firm over the best interest of the client. That is not necessarily a bad thing in a free enterprise world, but it can be a very bad thing if the client doesn’t understand the motivation of the people they use.
The DOL controls the oversight of the retirement plan world. That oversight includes IRA’s, as well as traditional retirement plans. The DOL decided it had seen enough and that it was time to institute a fiduciary standard for those investment professionals that work with retirement money. Their ruling came out last week and investment firms will be forced to implement the new standard within the next year. This is a huge game changer in the investment advice world. Anyone giving advice but not signing on as a fiduciary is having to rethink how they are going to move forward. Some have already indicated that they will quit that part of the business; most are trying to retool their offerings.
I want to thank the DOL for taking a bulldog grasp of this issue and keeping it alive until they could get a new standard in place. The good news is that this should all be a benefit to the client. The client will actually get to work with advisers in the retirement space that have to put the client’s interest first. There are firms out there that have been doing this for a while. If you have an IRA you might want to ask your current adviser if they or their firm will sign a statement that says they will take fiduciary responsibility for the advice they give. If not, it may be time to look around for someone who will.
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed, LLC