Key Points:

• Consumers are confused about the services financial advisors provide and their different, often contradictory, ethical and regulatory responsibilities.

• The Department of Labor’s new “Fiduciary Rule” attempts to provide relief to consumers by expanding the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA), elevating all financial professionals who provide retirement planning advice to the level of a “fiduciary”.

• As a Registered Investment Advisor (RIA), Capstone has always been and will remain bound to a fiduciary standard when providing financial planning advice and investment advice across all types of accounts.

The title of “Financial Planner” is often associated with an individual who assists others in making financial decisions in areas such as budgeting, saving, investing, and retirement planning. Every year, financial planners provide valuable advice and innovative solutions to millions of Americans to help them achieve their financial goals. However, many financial advisors are motivated by economic incentives when providing investment advice. They misrepresent themselves as true financial planners even though they lack the required formal education and credentials, or work in a sales capacity. It is no surprise that consumers are confused about the services financial advisors provide and their different, often contradictory, ethical and regulatory responsibilities.

According to a study conducted by the RAND Center for Corporate Ethics, researchers determined that,

This is likely because some financial advisors (particularly broker-dealers) present themselves as “financial planners” to convey that they offer full financial planning services. They may also do this to hide the fact that they are providing services under the “suitability standard of care” rather than the “fiduciary standard of care,” which is more stringent. Based on studies conducted by the Cerulli Associates, historically there has been a significant gap between the number of advisors who self-identified themselves as financial planners and the number of advisors who were actually providing sound financial planning advice2.  

These evaluations were based on analyses of the types of services offered and professional designations earned. (See Figure 1.) This gap has existed for some time, and has shown no sign of slowing down.

Consumers have not only had an increasingly difficult time finding qualified advisors, but they haven’t been receiving the services they desire either. A study conducted by Fondulas Strategic Research found that,

(See Figure 2.) The results of the study show that while there is a desire from consumers to receive financial planning advice, it’s difficult for them to find advisors who can provide the qualified advice they need. Consequently, many financial plans may be missing critical components that may be necessary for consumers to achieve their financial goals.

In response to this growing dilemma, the Department of Labor (DOL) passed the long-awaited “Fiduciary Rule” on June 9th, 2017. The ruling attempts to provide relief to consumers by expanding the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA). This change would therefore elevate all financial professionals who provide retirement planning advice to the level of a fiduciary. According to the DOL, a fiduciary is someone who acts in the best interest of their clients, and always puts clients’ interests ahead of their own. A fiduciary must reveal any potential conflicts of interest, and must also clearly disclose all fees and commissions to a client.

ERISA was initially established to safeguard retirement assets by implementing rules that qualified plans (e.g., 401k and 403(b) plans) must follow to ensure that plan fiduciaries do not misuse plan assets. Under the new Fiduciary Rule, any advisor who provides investment advice for compensation to a client will now be considered a fiduciary. One of the most important changes to note here is that, in addition to qualified plans, assets in Individual Retirement Accounts (IRAs) will now be covered under the new Fiduciary Rule. Unfortunately, the new rule doesn’t cover taxable accounts such as brokerage and trust accounts.

At the time of writing, the DOL is taking comments and feedback from the industry while draft legislation is being introduced to overturn the rule. On November 29th, 2017, the DOL announced an 18-month extension (from January 1, 2018 to July 1, 2019) of the transition period for fiduciaries to fully comply with the new rule. It is possible that the rule may not be finalized with advisory firms under full compliance until the end of the transition period, or possibly longer. When the new rule is eventually finalized in some shape or form, it is likely to have at least some impact on all financial advisors. However, those advisors who get paid based on commissions, such as brokers and insurance agents, will be impacted the most.

As a Registered Investment Advisor (RIA), Capstone has always been and will remain bound to a fiduciary standard when providing financial planning and investment advice across all types of accounts (i.e., qualified plans, IRA accounts, and taxable accounts). All advisors at Capstone are Certified Financial PlannerTM (CFP®) professionals, Certified Public Accountants (CPA) or Chartered Financial Analysts (CFA) that all abide by strict codes of ethics and high professional standards.  Given our approach to comprehensive financial planning and our transparent, fee-only compensation model, Capstone will continue to offer independent investment advice, helping clients develop appropriate financial plans.

Sources

¹RAND, Investment Advisers and Broker-Dealers Research Brief

²CFP Board, Regulation of Financial Planners