posted on November 22nd 2016 in Fort Worth CFP Team Posts with 0 Comments /

I got a call from a reporter this week asking if I thought there were any loopholes in the Department of Labor’s (DOL’s) supposed expansion of the “investment advice fiduciary” definition. I’ve written on this topic before, but it’s worth looking at from multiple angles.  

This is quite possibly the most important story of modern financial services, and one my financial planners in Dallas-Fort Worth and I have been discussing on a weekly basis. Unfortunately, it’s complicated. Rather than discussing the intricacies of the ruling, I instead want to focus on practical advice on how to navigate it.

The Basics

Do not assume your advisor is a fiduciary. If he or she wasn’t before, don’t assume this changes anything. People must understand that the new rules do not require an advisor to owe a client a fiduciary duty at all times. In fact, the rules only pertain to retirement assets. They also don’t necessarily eliminate conflicts of interest pertaining to what products an advisor recommends or how an advisor gets paid.

What to Ask

I can sum up those key concerns in just two questions:

 

  • Do you use a fee-only compensation structure at all times and with all clients?
  • Do you owe me a fiduciary duty at all times?  

 

Why Wording is so Important

Loopholes allow advisors to be “dually registered” or “hybrids.” That means they may owe you a fiduciary duty with fee-only compensation one minute, but then change hats and become a broker with a fee-based compensation. Sometimes only you pay them. Other times, someone else pays them to offer you a certain product. It’s quite confusing.

Your main concern is that nobody is able to pay your advisor or his firm except you. Your secondary concern is that the advisor is not limited to a certain suite of products, or that his or her firm doesn’t make more money by preferring a certain product. Going to an advisor whose firm has limited him or her to a short list of products is like hiring a handyman who only has a hammer. If all you have is that one tool, you’ll try to solve all problems with it. You shouldn’t be hiring an advisor to sell you a product, but to solve problems and make decisions.

Don’t confuse this with an advisor having convictions on doing things in a certain way. An advisor should be able to clearly articulate his or her philosophy and how the investments recommended fit into it. You just want to ensure that the way he or she does things is not related to being paid to recommend those specific products.

Confusion in “Conflicts of Interest”

Also watch out for banks or other massive financial firms that set up a private arm that tries to look more like a fiduciary or even claims to be a fiduciary. These types of entities are frequently criticized and penalized for conflicts of interest related to their preference for their own in-house products or products set up by their parent company. They also may still claim to be a fiduciary by disclosing conflicts of interest in their fine print. It’s important to understand that conflicts of interest aren’t technically illegal. It’s technically only illegal if the advisor fails to disclose the conflicts of interest.

What an investor has to ask is whether simple disclosure is really enough. Do you want an advisor who structures his or her business to avoid conflicts of interest, or an advisor who discloses conflicts of interest deep inside paperwork you may never thoroughly read?

How might they still slip past DOL standards?

Much remains to be seen on how this will work out. My gut feeling says a lot of this will end up hidden in disclosures. It’s too early to tell for sure how this will happen. I could imagine a scenario where a broker could ask a client to sign a document that nullifies even the specific situations where they would owe a client a fiduciary duty by actually preying on someone’s distrust for government. “The government is trying to limit your options, but if you sign this, I can discuss other solutions with you.”

Concluding remarks

I believe things are slowly getting better for the consumer.  I can’t say government is helping a lot, but it is putting a very important topic in front of the population. That in itself is a huge win for the self-made entrepreneurial American who is saving for retirement. Still, let us not operate under the assumption that all is clear, for in reality, very little has changed.

about the author: Joshua I. Wilson CMT

Josh-Wilson CMTJoshua I. Wilson, CMT®, AIF® is a partner and wealth manager who has managed over $2B for TD Ameritrade. Joshua led the national training and development program for all of TDA’s new advisors and managers, won a national coaching award. Joshua gave his graduation speech at Brown University. Joshua is a Chartered Market Technician® (CMT®) and a Accredited Investment Fiduciary® (AIF®).

Learn more and/or Contact Joshua

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