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On June 9, a quiet storm blew over the financial services industry.

Compliance with the long-awaited Department of Labor (DOL) fiduciary rule became a reality.

Now firms must comply with the fiduciary definition along with provisions on conflicts of interest and impartial conduct. Written disclosures requirements kick in Jan. 1, 2018.

What does this watershed moment mean to the industry?

Some observers expect the DOL to try to “overturn or modify the current rule.” Others predict that in “three to five years all advisors will be fiduciaries for both retirement and nonretirement accounts.”

Under pressure from both the rule and clients, many brokers, broker-dealer firms and wirehouses will scramble to shift from the “suitability standard” to the higher fiduciary standard of care, requiring advisors act in clients’ best interest.

Best Interest vs. Suitability

This excerpt from a recent Forbes Magazine article explains the difference with a familiar car purchase analogy:

“Under the suitability standard, the dealer could say, “A Ford Explorer would meet all of your needs and we have some of those right over here.”  The dealer makes the sale and gets the commission.  You have a car that is suitable for your needs, but it isn’t necessarily what’s best for you.  Since you don’t have a great deal of knowledge about the auto market, you are in the dark.

Under the fiduciary standard, the dealer would be obligated to say, “It sounds like you are describing a Toyota Highlander.  We don’t sell those.  In order to get exactly what you described, you would have to go down the street to Toyota and ask for a Highlander.  I can sell you a similar model called a Ford Explorer, it’s more expensive and it isn’t exactly what you described.”  In this scenario, you have more information about your options and the conflicts driving the dealer.

The Ford dealer has a clear conflict of interest in this situation.  He can only sell Fords and will lose the opportunity to earn a commission if the client buys a Toyota Highlander.  Under the suitability standard, the client ends up with a product (Ford Explorer) that isn’t the best fit given their situation and it costs more than the better-fitting product (Toyota Highlander).  Worst of all, the client probably has no idea that they weren’t given advice that put their own interests first.”


Fotolia 159439174 XS And so it is, the difference between brokers (registered representatives) and RIAs (registered investment advisors) as explained in our last blog on why you must know the difference between RIAs and brokers
Roush Investment Group opened its doors in 2010 as a 3(21) fiduciary; we’ve practiced in the sole interest of our clients from day one. As far as we’re concerned, the rest of the industry has arrived unfashionably late to the party.

Costly Move to Change

The shift to a fiduciary standard of care is not for the faint of heart. A 2016 study by A.T. Kearney forecasts the industry will sacrifice $20 billion in lost revenue through 2020, as more informed clients want to do business with fiduciaries. In fact, it is expected up to $2 trillion in assets will shift among different firms.

Fotolia 110873247 XSBut here’s the rub. The rule is not a mandate. “By and large, absent a government mandate, you’ll find firms holding strong and trying not to deliver advice under a fiduciary standard,” predicts Brian Hamburger, president and CEO of MarketCounsel, a business and regulatory consulting firm for investment advisors.

In an interview with Barron’s, Hamburger shared his belief that most firms will stick to the status quo unless forced to change because the old ways are more profitable.

And the only force that can force a change is the Securities and Exchange Commission (SEC), which holds power to create a uniform regulatory standard governing the behavior of all brokers and investment advisors. One can speculate such a standard is the only way “we’re going to see the best investor protection possible,” says Charles Goldman, CEO of AssetMark.

Objectively, the new fiduciary rule may not automatically guarantee the full protection clients seek. First, the DOL “continues to look at the rule’s wording and aren’t promising they won’t change it. In fact, this is one of the reasons they used to justify any enforcement until the start of next year,” explains Chris Carosa on Second, pundits agree the rule has loopholes, which could lead to abuses.

More important, what does all this mean to you as a Roush client or prospect?

In my opinion, you still need to rely on your instincts about who is and who is not a “trusted advisor.” He or she may operate as a fiduciary. But what if they fall short in integrity, expertise, critical thinking, authenticity, insight or caring? No rule can compensate for these deficiencies.

Rest easy. You, your family, your business, and accounts are carefully wrapped in the best protection possible. We have always operated in your sole interest under the fiduciary standard of care.

Remember, I once came from the other side. When we launched our firm, I knew what to do to build a wall of protection around my clients because I’ve witnessed firsthand the consequences of working with people driven only by the profit motive. Pushing proprietary products. Hidden fees and commissions. Risky investments. These are nowhere in our DNA.

For business owners (plan sponsors) offering 401(k) plans through us, you, too, are fiduciaries.

In our next post, we’ll talk about what you need to do to ensure you remain in compliance.

Better yet, this may be the ideal time to consider a compliance audit on your retirement plan.

Don’t risk hefty fines and litigation. We’re here to protect you.

To Your Financial Freedom,

rick roush

Rick Roush AIF®, CPFA

Roush Investment Group

O: 559.579.1490 F: (559) 490-2015 C: (559) 285-3318