Putting Investors’ Interests First – By Choice or by Legislation?

Putting Investors’ Interests First – By Choice or by Legislation?

The DOL Fiduciary Rule

After almost a decade of wrangling over the details, the Department of Labor’s Fiduciary Rule officially went into effect on June 9, 2017.

What does this mean? All financial advisors are now required by law to always act in the best interests of their clients when providing advice on retirement accounts or retirement planning. This includes greater fee transparency, ensuring fees are reasonable, and disclosing potential conflicts of interest.

How Does This Impact You?

The good news is that this new rule has no effect on any of our clients’ accounts and does not impact the way we do business at Capstone Capital. Since our inception as an independent registered investment advisor in 2002, we have voluntarily adhered to the fiduciary standard as defined by the Advisors Act, and have clearly disclosed fees and potential conflicts of interest to our investors.

Although this new rule has garnered significant controversy in the financial industry and certain aspects of it still need to be clarified, we feel that overall it will be a good thing for investors. We are especially pleased that substantial media attention surrounding the DOL Fiduciary Rule has increased public awareness and understanding of the importance of the fiduciary standard and the benefit it provides to investors.

You may be thinking, “What’s the big deal? Don’t all financial professionals already put their clients’ interests first?” Unfortunately, the reality is that until now, many financial professionals were only bound by a “suitability standard.” In other words, they could recommend investment products that would give them the highest payout or count towards sales quotas, as long as they were reasonably suited to an investor’s goals, even if not necessarily the best recommendation for the investor.

Many firms have been aggressively fighting this new regulation for years because it significantly impacts their business model. Now they are scrambling to implement drastic changes in how they charge clients, how their advisors are paid, and how they report fees to comply with the new rules. As a result, many are requiring current investors to change their fee arrangements and investment selections.

Keep in mind the DOL Fiduciary Rule only applies to retirement accounts, such as 401(k)s, IRAs, and profit sharing plans. Many financial professionals still are not required to act as fiduciaries on non-retirement accounts, such as brokerage accounts held in the client’s name personally or in the name of their trust. At Capstone Capital, we act as fiduciaries for all types of accounts, not just for retirement accounts.

Pros and Cons

In our discussions with clients about this rule, we have discovered that some are concerned the government has overstepped its bounds in dictating what types of investments can be held in retirement accounts. Some experts worry that many advisors will be less willing to take on small accounts because of the additional liability and reduced ability to charge high commissions to make small investment amounts worth their while. Despite the potential drawbacks of the rule, we are confident that greater fee transparency and other industry-wide adjustments resulting from it will benefit investors in the long run.

Although the fee aspects of the new rule seem to have garnered the most attention, fiduciary duty extends to every facet of a client’s finances. Consequently, retirement investors should now also benefit from greater consideration to their risk tolerance, short-term goals, long-term goals, family dynamics, liquidity needs, tax implications, and other important overall planning considerations.

Not All Fiduciaries Are Equal

Not everything can be legislated. Thankfully, the DOL Fiduciary Rule still allows for differences of opinion as to what is best for a client. Due to differences in background, experience, education, and even personality, two equally competent and honest advisors could disagree on the proper course of action while acting in good faith to promote the best interest of the client.

Therefore, despite the merits of this new regulation, it is vital for investors to work with an advisor they feel they can trust, who best matches their values, goals, and personality.

Adam Dawson, CFP® is a Principal at Capstone Capital and the author of Timeless Principles of Financial Security.

Adam Dawson

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