There has been a delay in the new fiduciary rule for anyone working with qualified accounts. It originally was set for April 10, 2017 but has been delayed at least until June, 2017. Many fiduciary pundits are criticizing the move. While many brokerage firms and insurance companies like Merrill Lynch and John Hancock are applauding.
What is the fiduciary standard. How does it affect investors? Who really cares? Will the fiduciary standard eliminate conflicts of interest?
First I would like to discuss the conventional business models financial advisors/brokers follow:
- Commission based brokers – these brokers currently follow the suitability standard. This model is not required to recommend or sell the best solution for the client. Their only requirement is the product is suitable. Price or quality, do not enter into the broker’s decision making process. This model has the potential for the most conflicts of interest. Remember the typical broker is employed by a broker/dealer, wirehouse or insurance company and not you. They are accountable to their employer and will sell what the employer tells them to sell.
- Fee Based advisor/broker – this business model tries to give the impression that they are on your side. In many cases this is true. However, you do not know when the advisor/broker is wearing the fiduciary cap or the suitability cap. Conflicts of interest are reduced but not forgotten.
- Fee only advisor – this business model has been receiving substantial amounts of press coverage. This model only accepts fees directly from the client, thereby minimizing conflicts of interest. However, most advisors earn their fees by assets under management. A small portion of fees are earned by charging hourly fees for services rendered. The problem or conflict arises when the advisor does whatever the client asks in order to keep the account. Remember the assets under management fees stop when the client moves their account. There are also many clients who hear fee only and believe that this advisor if only concerned with fees and not the clients welfare.
The fiduciary debate will continue until a compromise is reached. It is anyone’s guess where this compromise will land. Will the fiduciary standard become so diluted that it loses all credibility? Financial institutions have resisted the fiduciary standard and will continue to resist, because it may cause sales to drop. After all they do not want a standard which puts the client first. If this would be the case how would they make money?
This leads us to a ‘new’ model I named the Client Only Advisor. This advisor has developed a prudent process in building a portfolio. This process involves an academically backed strategy, which over time will result in superior results for the client. If the client decides after implementation that this strategy is not for them the advisor will ask where they would like their account transferred. This may sound like ‘my way or the highway’, but it is really introducing discipline to the investment process. This is where a Client Only Advisor adds value. They will prevent the client from buying high and selling low.
The question becomes are commissions always bad? When working on a clients’ financial plan life insurance may be a solution. This is a question I do not have an answer for.
The true value of an advisor is to keep their clients informed and disciplined. They will protect the future you from the current you.
Regardless of the outcome. Investors should seek out the advice of a fiduciary adviser. Make your adviser put your interests first. And make it official.