Fiduciary Rules!

Within the next few months, the U.S. Department of Labor is expected to release final rules that will impose a fiduciary standard of care on financial advisors (including insurance agents) working with qualified retirement employer-sponsored plans and individual retirement accounts.  While I'm generally against more regulations, this happens to be of the best and most overdue pieces of federal rule-making ever.

First, let’s clarify the two different rules under which financial advisors currently operate.

Suitability Standard of Care
Most financial advisors, including financial company representatives and insurance salespersons, operate under the suitability standard of care.  Generally speaking, the suitability standard simply requires the advisor to 1) know the client and their financial situation, and 2) recommend products that are suitable for their situation.

Fiduciary Standard of Care
Some financial advisors, including Certified Financial Planner® professionals, must operate under the fiduciary standard of care.  Under this standard, advisors must 1) put the client's best interest first; 2) act with prudence, meaning with the skill, diligence and good judgment of a professional; 3) provide full and fair disclosure of all important facts; 4) avoid conflicts of interest; and 5) fully disclose and fairly manage, in the client's favor, unavoidable conflicts.

While the general public often assumes financial advisors are working in the client’s best interests, in fact, most are not bound to do so.  The new Labor Department rules would change that, making the fiduciary standard the actual standard in financial advising.  It boils down to every advisor following the highest standard of care regarding investment advice and retirement planning.

Seems like a slam-dunk, right?  In truth, large financial institutions (particularly insurers) are spending millions in a lobbying effort to stop the rules from being codified.  There is only one viable reason for this:  Greed.

Big financial institutions use the fecklessness of the suitability rule to sell lots of useless financial products to trusting people who don't need them, thereby capturing huge commissions and other fees.  This is great for the company, while simultaneously terrible for everyone else.  In short, those companies value profits over people.

Let's just hope this fiduciary rule regulation is made final, and comes with the enforcement it deserves.