Monday, July 13, 2020

DOL Fiduciary Rule: Why It Matters To You

While there has been no shortage of interesting headlines coming out of Washington D.C. in recent weeks, almost lost in the shuffle of everything else has been a very important tug-of-war going on that is of great importance to the investment industry and to people across the country who are trying to build their retirement nest eggs.

The Department of Labor’s Fiduciary Rule, created under the Obama administration, was set to become binding on April 10, 2017. Now, however, its status is in limbo as the new administration decides if it wants the rule at all. The DOL Fiduciary Rule states that any financial advisor recommending investments for a client’s retirement account is required to act in the best interest of that client. Taking on a fiduciary responsibility would represent a significant change for the investment industry, much of which is still commission-driven whereby financial professionals are paid to steer their clients into certain investments.

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Should an Advisor be a Fiduciary or a Salesperson?

There are two main types of financial professionals who manage assets for clients: those who are held to a fiduciary standard and those who operate under a “suitability” standard. It is critically important for investors, if they have a professional helping them with their investments, to understand the type of professional with whom they are dealing. Knowing if an advisor is a salesperson or not will help clients to understand why certain products and funds are being recommended to them—and why certain other products are not being recommended.

“Suitability” Standard

Financial advisors operating under a “suitability” standard means their recommendations must be suitable for a client’s circumstances, a condition that, by design, can be interpreted very broadly. Typically, advisors acting under the suitability standard can and do receive compensation from fund companies for placing specific funds with their clients.

Fiduciary Standard

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Fiduciaries, on the other hand, have a legal and ethical obligation to put their clients’ interests ahead of their own and receive no such compensation from the purveyors of investment funds or other products.

You might think, given the complexity and risk inherent in financial markets, that it would be required for financial professionals to put their clients’ interest ahead of their own. However, this is not the case at all. In fact, unbeknownst to most investors, much of the investment industry operates as a sales machine whose representatives have no fiduciary duty to clients. While there are of course many such representatives who care deeply for their clients and do right by them, there are also some bad apples who are more concerned with their own financial well-being than that of their clients. Brokerage firms, banks and insurance companies all have no obligation to put their clients’ interests first.

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In our view, the commission-driven industry model is broken and does not serve the interests of investors. To understand how your advisor operates, simply ask if he or she is a fiduciary. If the answer is “no”, then ask your advisor how he or she is compensated for making investment recommendations for your account.

How Our Fiduciary Standard Protects You

Since our firm’s inception in April 2002, we have always operated under the fiduciary standard. We believe that the type of investment firm that most closely aligns the interests of the client with the interests of the advisor is a fee-only Registered Investment Advisor. We have always put our clients’ interest first and have never earned a single dollar in commission for placing an investment with a client. Our sole focus is on growing our clients’ portfolio using a strategy that is both comfortable for them and appropriate for their financial circumstances. Our clients understand that our only loyalty is to them—not to a fund company or a larger parent company.

We are an independent resource for our clients. Because our only goal is to grow our clients’ portfolios, we provide objective and straightforward advice about any investment a client is considering. To us, securities are merely tools that we use to pursue our objective of increasing the value of our clients’ portfolios. A few are worthwhile to own; the vast majority are not.

We are pleased that all of the discussion and debate about the DOL Rule has raised public awareness about how the investment industry works. The DOL Rule ups the ante for everyone in the investment advice business, including Registered Investment Advisors such as Orion that already operate under the fiduciary standard. We too will have additional know-your-client standards and protocols that we will need to implement and certain cost-comparisons that will be needed to made explicit when investing our clients’ retirement account assets.

In the end, investors across the country stand to benefit from the DOL Fiduciary Rule. Forcing banks and brokerage firms to adopt a fiduciary standard when they provide retirement advice cannot help but improve both the investment outcomes for clients and the experience that clients have with their advisors. The DOL Rule, if it survives, will somewhat level the playing field (from a marketing perspective) between Registered Investment Advisors and brokerage firms, as both will be able to claim to be fiduciaries. Nevertheless, we believe the DOL Rule will benefit the great majority of retirement savers and therefore support its implementation.

Please do not hesitate to contact me if there is anything about the markets or your portfolio that you would like to discuss.

Read more of Our Commentary here.


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