The New Fiduciary Rule

The New Fiduciary Rule

For Creative’s Clients, Everything is the Same

Peter Mallouk
JD, MBA, CFP®
Chief Investment Officer
cpi@creativeplanning.com

Last year, the Obama Administration created a fiduciary rule intended to protect retirement investors. The goal was to help investors protect their hard-earned retirement savings by ensuring financial advisors would have to act in their best interests. To help make this happen, the Department of Labor (DOL) created the Fiduciary Rule. The DOL, under the current Trump Administration, has now given it the green light, with an effective date of January 1, 2018.

The new rule contains thousands and thousands of words, but basically says just this: any advisor giving advice must act in the client’s best interest when advising on a retirement plan asset, such as an IRA, unless the investor signs a contract waiving that obligation. In other words, all financial advisors are now bound legally and ethically to meet the standards of a true “fiduciary,” at least some of the time.1

The biggest news to most Americans is not this rule, but that they thought their financial advisors had to act in their best interests already! It does, after all, seem like a reasonable assumption. The reality is that this is not the case at all. In fact, approximately 90% of the advisors in America are brokers some or all of the time, which means they follow an entirely different set of laws that do not require them to act in the client’s best interest. Brokers follow the “suitability standard,” requiring them to make recommendations they believe to be suitable.2 A broker’s primary obligation is to the firm he or she is working for and to its shareholders…not you. That is it: suitable. A fiduciary, however, follows a “fiduciary standard,” requiring him or her to act in your best interest.3

To muddy things up a bit more, there are now dually registered advisors. Some independent investment advisors are registered as both an independent advisor and a broker. Yep, one person serving two masters: you and the firm.4 By dually registering, an advisor can operate under the fiduciary standard sometimes, and as a broker avoiding the standard sometimes. Good luck figuring out which is which.

At Creative Planning, we have always been fiduciaries for every client regarding all of their investments, all of the time. We never receive commissions from our clients or any third party on any investment, are never paid differently on any investment, and do not recommend or even have any of our own investment products.5 This should not sound like a big deal, but only a small percentage of advisors in America can say this simple fact: we are a fiduciary 100% of the time when it comes to all of our clients’ investments.

The new Fiduciary Rule, now in effect, requires even brokers to act as fiduciaries when it comes to advising on retirement plan assets.6 “Suitable,” you could say, is no longer suitable.7

1Progress but quite ridiculous on its face. Can you imagine going to a doctor that only has to act in your best interests some of the time? A lawyer? A CPA? This alarmingly low threshold is unique to the financial services profession.

2When was the last time you wanted anything “Suitable” instead of “Best”? Are you interested in a suitable spouse? A suitable life? Suitable healthcare? Of course not, you always want the best you can get.

3This is not a global aberration. Financial advisors in Australia and the United Kingdom are fiduciaries all of the time. Us statesiders, apparently, like the challenge of having to figure out when an advisor is acting as a fiduciary.

4How is anyone supposed to figure this out? This is like going to a dietician that also owns a Dairy Queen. You think you are getting advice on how to be healthy, but it sure seems weird that you keep getting offered ice cream for dinner.

5Watch out for this too as this is the ultimate conflict. You do not pay a Ford dealer a fee to ask which type of car to buy! And you do not go to a butcher to ask if you should buy fish instead of meat.

6This is true unless they get a client to waive this requirement, which would be a fascinating conversation to observe.

7At least when it comes to retirement assets, and even then the broker could obtain an exemption. Talk about a watered down rule. Geez!