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Why the Fiduciary Rule Matters

In August 2017, the Department of Labor (DOL) announced that they would be delaying the final phase of the Fiduciary Rule. What does that mean, and why is it important to your finances? We’ll explore the implications of the delay, and why the fiduciary rule matters.

What is a Fiduciary?

A fiduciary is someone who acts in the best interest of his or her client (think lawyers, doctors, and registered investment advisors). According to the Institute for the Fiduciary Standard, there are six key duties a fiduciary should consistently perform:

  • Serve the client’s best interest
  • Act in utmost good faith
  • Act prudently with the care, skill and judgment of a professional
  • Avoid conflicts of interest
  • Disclose all material facts
  • Control investment expenses

This means that in terms of financial advice, an advisor has a duty to put their clients’ needs before their own, regardless of how they stand to profit from the advice they give, their firm’s interests, or the interests of others. Ideally, all financial advisors would operate by a fiduciary standard. However, some in the financial industry act only upon the “suitability” standard. This means they make suitable recommendations for their client, without necessarily considering their client’s best interest.

The History of the Implementation and Delay of the Fiduciary Rule

The fiduciary rule was initially intended to roll out in April 2017 and be completely phased in by January 2018. The rule essentially ensured that professionals offering financial retirement plans (like employer retirement plans or Individual IRAs) would be held to this fiduciary standard.

However, the current government administration sought to delay the final implementation to June 2017 to review the rule’s impact. In August of last year, however, the DOL extended the delay to July 2019 for further study and review and coordinate with the SEC.

Why the Fiduciary Rule Matters for You

To understand why the fiduciary rule matters for you, consider the following example. Imagine you need a new iPhone but don’t really know which phone model would be best for you. You explain to the salesperson that you don’t need a lot of phone minutes but you use a lot of data and messaging. Under the suitability standard, a salesperson could listen to your needs and suggest you buy the iPhoneX. It has more options than you actually need, and is the most expensive option. The salesperson suggests this option based on the commission they’d get from the sale. Under the fiduciary standard, the same salesperson would be obligated to tell you that an iPhoneX isn’t the best option for you; while it would technically work for your needs, it would be more expensive and out of your budget. Rather, they recommend going with the iPhone 8, which is cheaper but better fits your needs. The salesperson will make less from the sale, but they are putting your needs in front of their own.

In summary:

How can you be certain that your financial advisor is acting in your best interest, or rather, what might only be suitable for your needs? Never be afraid to ask if your professional is a Investment Advisor Representatives, or to have things in writing. At Chatterton and Associates, we are a team of Investment Advisor Representatives and will always put your best interest first. If you have any questions regarding the fiduciary standard or if you need help with your retirement planning, contact us today to see how we can assist you.

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