By Patrick D. Runyen, CPA, PFS, CFP

The term “fiduciary” has become a buzzword in the financial press recently. From the traditional financial press to comedians on television, everyone seems to be weighing in on the subject.

The recent interest is the result of President Barack Obama in 2015 calling on the Department of Labor (DOL) to “update the rules and requirements that retirement advisers put the best interests of their clients above their own financial interests.” This led to the DOL proposing regulations that were fiercely debated, but ultimately approved by the Office of Management and Budget. They are scheduled to be phased in completely by Jan. 1, 2018. However, President Donald Trump signed an executive order to revisit the fiduciary standard, which could lead to it being eliminated. This has resulted in uncertainty regarding the future of how advisers will be regulated.

The Impact

The fiduciary standard impacts some advisers more than others. As summarized in this article, advisers regulated by the Securities and Exchange Commission (SEC) or a state securities regulator are already held to the fiduciary standard in all dealings with clients. These advisers, often referred to as Registered Investment Advisors (RIAs), are often compensated by asset management fees.

Other professionals, often referred to as brokers, which include stockbrokers, broker-dealer representatives, insurance agents, and others, are regulated by the Financial Industry Regulatory Authority (FINRA). These folks are held to the “suitability” standard of conduct, which means investment recommendations must be suitable for investors based on their financial profile, but are not required by law to act in their clients’ best interests. They are often compensated by commissions on transactions or on the sale of products.

The Obama standard would legally require brokers to act as fiduciaries when advising on retirement accounts, such as IRAs, while operating under the same suitability standard on nonretirement accounts.

Pros and Cons

The winners of the Obama standard would be individual investors, since it would help reduce the amount of high commissions on product sales and avoid being sold products that may be unsuitable for their situation.

There has been strong opposition from many in the brokerage and insurance industries to this standard. The primary disagreement has been that the rules will limit choices to individual investors. If the standard remains intact, many brokers could see a large reduction in commission revenue off of product sales, such as variable annuities. Another concern is that the firms these brokers work for will have increased overhead costs in order to comply with the regulations. The increased costs of compliance could disproportionately impact smaller brokerage firms, potentially causing some to leave the industry.

If Repealed

It’s hard to determine what will happen long-term if the standard dies. Many large brokerage firms already have begun to roll out changes to comply with the Obama rules, and plan to keep some or all of these changes regardless of what happens. My best guess is if the rules go away, the affected firms will likely go back to operating under the “suitability” standard given the lucrative incentives.

My opinion is this will ultimately be a net positive for individual investors over the long-term given the awareness it has raised. Since the middle of last year, many new clients I’ve met with will ask if I’m held to a fiduciary standard (yes). Before that, no one asked such a question. I’ve also heard of practicing CPAs being asked the same questions, many of whom refer to the AICPA’s Fiduciary Standard of Care.

Many individuals turn to their CPA for advice on how to pick a financial advisor. It’s important that CPAs understand these changes to ensure they can best point their client in the right direction.

Patrick D. Runyen, CPA/PFS, CFP, is a wealth manager at Independence Advisors LLC, a fee-only Registered Investment Advisory firm in Wayne, Pa. He can be reached at prunyen@independenceadvisors.com.

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