Someday, some way, the federal standard for fiduciary responsibility among financial advisors will be altered.
But many state regulators have decided not to wait for the federal regulation to get updated, and have taken matters into their own hands, setting fiduciary standard for advisors who work within their state lines.
A fiduciary standard for advisors requires them to act solely in the client’s best interests when offering personalized financial advice. It does not preclude the advisor receiving a fee or commission in the process, but it requires that the recommendation be foremost in the best interests of the client.
The fiduciary standard is not one that is roundly understood among investors. In a 2017 Spectrem study Advisor Relationships and Changing Advice Requirements, 80 percent of investors with a net worth between $1 million and $5 million claim to understand what a fiduciary is, while 85 percent believe their advisor acts as a fiduciary. Those research results alone indicate that investors do not fully understand the fiduciary standard.
But what is known is that the fiduciary standard matters to investors. While only 47 percent of Millionaires investors know the actual definition of fiduciary (a professional looking out for the client’s best interests), 63 percent said they were somewhat willing or very willing to pay more for a financial advisor who is a fiduciary, which is why the standard for claiming to be a fiduciary matters.
On May 23, 2019, the Department of Labor announced that it will once again issue a new set of fiduciary standards in December, with the required six-month comment period to follow. The DOL fiduciary rule was originally scheduled to be activated by Jan. 1, 2018, but the rule was vacated by the Fifth Circuit Court of Appeals in June of 2018 amid seemingly endless arguments about how to implement the rule as it relates to retirement accounts. Many industry insiders believe the fiduciary rule will cut advisor commissions and make the occupation less attractive.
In effect, the DOL has decided to try again.
But some U.S. states have decided to move ahead with their own regulations rather than wait for the federal standard to be adopted and accepted. Maryland, New York, New Jersey and Nevada have all worked toward creating their own fiduciary standard for advisors, although the states do not have identical approaches. New York, for example, concentrates its efforts on the sale of insurance, while Nevada has included securities sales along with insurance rules.
While many industry observers see a federally regulated fiduciary standard as a rule that puts a limit on advisor compensation, it is difficult to ignore the fact that investors would like to know their advisor must act in the client’s best interests, at least in some of their investment dealings.
The DOL December ruling will likely be challenged, as the last one was, so any state regulations are likely to be effective until a federal standard is reached.
©2019 Spectrem Group