You may have read about the controversy over the fiduciary standard in the investment advisory industry. The SEC recently passed legislation that brought this charged issue back into the spotlight. We want to share a short overview of what has transpired to help make sense of what you see in the media.
As a Registered Investment Advisor (RIA), we serve our clients using a fiduciary standard of care, meaning that we must always put the interests of our clients above our own. The fiduciary standard is the highest legal standard of care, one that we have embraced since our inception.
Other types of financial advisors, most notably brokers, are held to a lower legal standard, that of suitability. Brokers must believe that recommended products are suitable for the client, even if other approaches may be more appropriate or cost-effective.
The Department of Labor (DOL) began focusing on this disparity in 2010, when it first proposed that all advisors to retirement accounts be required to adhere to a fiduciary standard. Brokerage firms fought the proposed legislation, since it would necessitate a significant change to sales and compensation practices. Although the DOL did adopt a broader fiduciary standard to take effect in 2018, the new rule was subsequently vacated by executive order and the courts.
The Securities and Exchange Commission (SEC) then took on the issue. Last month, the final version of Regulation Best Interest (BI) was approved by SEC. It is a step up from the current suitability standard for brokers; however, it is far short of a fiduciary standard. It relies on new disclosures of conflicts of interest, such as use of proprietary products, or soft-dollar compensation and incentives, rather than taking steps to eliminate these inherently conflicted practices. In short, these new rules still do not require brokers to put investors’ interests first. So, while brokers will be able to state that they are acting in the “best interests” of their clients, with caveats, only advisors adhering to a “fiduciary” standard are putting their clients’ interests ahead of their own.
We will continue to embrace our fiduciary obligation to our clients, providing transparency in our advice and fee structure, and receiving compensation only from our client fees rather than from product sales or the managers we utilize. We believe this fee-only approach allows us to provide the most objective advice and results in the best outcomes for our clients.