Some of you may or may not be aware that the Department of Labor just published the final rules of an important piece of regulation called “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice.  Before I get in depth as to what this rule means for investors, let’s define it.  The term fiduciary comes from the Latin word fiducia meaning “trust.”  A fiduciary is a person who has the power and obligation to act for another under circumstances which require total trust, good faith and honesty.  In investment world terms, this means that a financial advisor must act solely in the best interest of their clients.

The reason why the DOL chose the rule for IRA’s and 401(k)’s and no other investment accounts was to protect middle-class investors.  A majority of Americans have their assets in retirement-focused accounts and have not accumulated plan balances that are sufficient to maintain their standard of living in retirement.  Although a number of factors have contributed to inadequate plan balances, subpar investment returns due to high fees undoubtedly play a part.

So what does this rule do for you? In essence, the new rule imposes a best-interest test on those who provide advice on retirement accounts, including IRA’s and 401(k)’s.  Previously, in the commissioned broker-dealer world, incentives existed for brokers to put retirement savers into investments that would simply meet much looser suitability standards.   Not all broker-dealers did this, but the incentives existed, potentially at the cost of investors purchasing these products.  Fiduciaries, on the other hand, are bound by the “best interest” standard and must place their needs behind that of their clients.  In most cases they do not work off of commissions but rather a fee for service to avoid this potential conflict of interest with investment advice.

In the end, this rule will be better for retirement savers as they should receive less conflicted advice because it will be driven by fiduciary concerns rather than by incentives to put customers in expensive products.  These changes will be important for those who opt for brokerage accounts in 401(k) plans, for those considering rollovers from 401(k)’s to IRA’s, and for those making ongoing investment decisions in IRA’s.

At Legacy Trust, the fiduciary standard is nothing new to us.  As a Michigan trust only bank, we have been bound by this rule not only for IRA’s but for trust administration, investment management and family office services since we started 12 years ago.