Fiduciary Standard Update


In April, 2016, the Department of Labor (DOL) issued a long-awaited rule that would hold brokers and investment advisors to a “fiduciary standard” for the investment of IRA and 401(k) accounts. The basic focus of the rule was to move the brokers and other investment advisors from the “suitability standard” to the higher “fiduciary standard”, with the tenets of placing the interest of their clients before their own, avoidance of any conflicts of interest, and full transparency as to all expenses associated with the investment of funds.

We actually offered our opinion on this announcement in our April 2016 Perspectives  As we noted, the fiduciary standard is nothing new to Legacy Trust, as we have been held to this highest standard since the inception of our firm.

The DOL Fiduciary Rule was slated to become effective on April 10 of this year and though the industry has resisted the imposition of this new standard, they have been reluctantly preparing for its enactment. Last Friday, the Trump Administration provided some short-term relief by issuing a memorandum temporarily halting the rule’s enactment and directing the DOL to review the impact of the rule and provide a recommendation to either revise the rule or rescind it altogether.

Why does all of this matter? Why is the industry resisting the imposition of this higher standard?  The answer lies in the rule’s mandates and the compliance reporting requirements to the DOL.  The assertion by the industry is that smaller investors could be harmed by the rule’s enactment  which requires mandatory compliance reporting.  Brokers, investment advisors, insurance companies and banks would be required to submit detailed reports on every account to document for the regulators that the new standards are being applied on a consistent and regular basis.  This adds costs to all in the industry and those costs are eventually passed on to the firm’s clients.  Opponents have argued that the added expense to investors could lead most advisors to raise fees, squeezing investment returns and pushing smaller investors elsewhere to lower cost, less personalized investment options.

The investing public is becoming more educated with the advent of new technologies and an abundance of investment data sources. Legacy Trust recommends investors become familiar with the principles of the fiduciary standard and be confident their current investment advisor adheres to this highest standard – not because they are mandated to comply with a government regulation, but because they embrace these tenets as the bedrock to a successful, long-term advisory relationship.