Investor Protection & Fiduciaries

In April, 2016, the Department of Labor (“DOL”) issued new rules defining the term “fiduciary”. These rules became law this year. Why does this matter to you?

As baby boomers retire and move money from their employer retirement plans to self-directed IRAs (called a “rollover”), boomers face a dizzying array of financial products from which to choose. Not surprisingly, most people in such situations seek out professional investment advisers to help them sort out what to do. Even though the DOL estimates that $2.4 trillion dollars will be rolled over from pension plans to IRAs between 2016 and 2020, what is often presented to the consumer as trusted investment advice is paid for in the form of high sales commissions to the adviser. In other words, the adviser sells products or a strategy to the consumer that makes more money for them, not the consumer.

Many investment professionals, consultants and advisers have had no obligation to follow fiduciary standards despite the critical role they play in guiding plan and IRA investments. So, for example, an adviser has been able to steer customers into investments based on the size of commissions they make on the investments, not on the benefit the investment may bring to their customer. Up to now, that clear conflict of interest has been legal.
Only a “fiduciary” is legally obligated to put the customer’s best interests ahead of their own and, if they don’t, they can be sued and held personally liable. At a time when consumers need the most protection to secure their retirements, they have been receiving the least. Up to now, that is.
Now, the law has mandated that anyone providing investment advice to a plan or IRA is a “fiduciary” and must live up to fiduciary rules, including avoiding conflicts of interest with clients.

The word “fiduciary” comes from the Latin word for trust. The relationship between an attorney and a client is a “fiduciary” relationship. That means that the attorney is legally obligated to act only in the best interests of the client—if the attorney breaches this “fiduciary duty”, the attorney can be held personally liable. Fiduciaries have a duty to avoid any conflicts of interest between themselves and their customers. A fiduciary duty is the strictest standard of care recognized by the U.S. legal system. The new DOL rule defines “fiduciary investment advice” and requires, at least with regard to retirement monies, that advisers act only for the benefit of their customers and protects customers from conflicts of interest, imprudence and disloyalty. This is a definite step forward in consumer financial protection, but how far does it go?

Most people do not realize that it is the DOL, not the Securities and Exchange Commission (“SEC”) or its broker-dealer arm, that regulates pension funds, even though the pension funds, 401(k)s, IRAs, SEPs, ROTH IRAs, etc. are composed of securities. So, although the DOL has now mandated that advisers must be fiduciaries with regard to retirement monies, there is no similar regulation for advisers who give ordinary securities advice to investors. Those advisers can still put their own interests ahead of the investor, with no obligation to disclose any conflicts.

The SEC has said they will issue a rule similar to the fiduciary rule put out by the DOL to protect ordinary investors; however, recently, the Chair of the SEC said the rule would have to wait. That new rule, if created, will change the standards for how advisers deal with investors. Up to now, advisers selling securities to investors have only had to follow the “suitability” rule. This rule says that so long as the adviser has a “reasonable basis” for believing that the recommendations they are making are suitable for you, the investor, no more need be done to protect you. Even if the adviser makes more commissions on a particular security, under the suitability rule, there is no obligation to disclose this to the investor. When and if the SEC determines that advisers must act as fiduciaries, however, all of that will change the face of investing and investor protection.

This is a complicated issue, but the bottom line for you as an investor is simple—ask your adviser on your pension plan whether he or she is a fiduciary. If they say yes, take them seriously because they are legally bound to protect you before themselves. If they say no, be skeptical about whether you are being protected adequately.

About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over 30 years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.

Leave a Reply