Perhaps you have noted controversies surrounding proposed regulatory rules that will govern stock brokers, financial and investment advisors or “advisers.” The Securities and Exchange Commission (SEC) is the primary regulator of brokers and investment advisers per the Dodd-Frank Act. However, the Employee Retirement Income Security Act of 1974 (ERISA) gave the U. S. Department of Labor (DOL) regulatory oversight relative to employee retirement plans.
What’s known as the “DOL fiduciary law” of 2016 was scheduled to be phased in between April 10, 2017, and January 1, 2018. It required financial professionals of all stripes who work with retirement plans (including IRAs) and/or provide retirement planning advice, to adhere to fiduciary standards.
Since DOL regulates advice and product placement matters in retirement plans, but not on the personal side of the ledger outside of retirement plans, confusion reigned. On one hand, a standard, but not on the other? Recognizing the complexities of a rule applied to only part of “the advice pie,” on March 15, 2018, The Fifth Circuit Court of Appeals in a 2-1 decision vacated the rule.
The court ruled DOL’s implementation of the rule constituted “unreasonableness; an arbitrary and capricious exercise of administrative power.” DOL has elected not to appeal the decision. Current thinking is that the SEC will be given time to come up with a rule governing all investment advice and product placement. What does this mean to you?
Essentially being a fiduciary says that someone giving you advice should act in your best interest. In a sense that goes beyond the Golden Rule to the Platinum Rule: “Do unto others as they would have you do unto them.” In other words, as DOL promulgated, serve your best interest as the client. What could be wrong with that?
On the surface, nothing. Working in your best interest is the “motherhood and apple pie” element of long term business success. Here’s the rub.
In a mind-numbing 1,023 page regulation, DOL never really defined “best interest.” In a May 3, 2018, op-ed in The Wall Street Journal, former SEC commissioner Paul Atkins, and former DOL solicitor Gregory Jacob, wrote that the “politically controlled” DOL’s fiduciary rule “was a plaintiff lawyer’s dream, filled with litigation-fostering ambiguities and the promise of lawsuits in state courts.”
It was a rule written by lawyers for lawyers. “Best interest” largely would be defined by future outcomes over which advisers have no control.
We advise clients that all investments have risks of some kind, whether interest rate risk, inflation risk, market risk, or specific failure or underperformance. That’s why you diversify. That’s why you should review prospectuses and other disclosures. That’s why you are urged to consult with other advisers such as your CPA and/or attorney when tax, estate planning, and legal matters are involved. That’s why a investment adviser should go to great lengths to educate you so you can tell the difference between advice and a sales pitch.
Even today we see ads from “ambulance chasing” lawyers saying contact let’ssue‘em.com if you lost money in an investment.
“Best interest” conversations go into great depth about life. About life transitions and the challenges you face, both positive and negative. It’s about family and those you love and care for and the odds that you can or cannot meet your objectives and expectations. It’s about strategies that seem best suited based on what is known today to deal with envisioned transitions and/or immediate problems. It’s about resources available or needed to power what are judged the best current alternatives to meet challenges. It’s about advisors with the experience and wisdom to know that questions may be more important than answers, especially early in the planning phase. It’s about fears, confidence, and dreams.
The best laid plans require monitoring and periodic course alterations, based on changes in the scenarios that surround you, in the world at large and with yourself and those who you love and who depend on you. Planning is dynamic, ongoing.
What’s in your best interest today may not be tomorrow. “Man plans. God laughs.”
Absolutely financial advisors should work with your best interest in mind. The minute you detect otherwise, walk away. But 1000 page plus regulations are a lawyer’s marketing dream. One of the reasons medical costs are so expensive is sky high liability costs. Myriad complex, confusing, and poorly written government regulations are a component of inflationary pressures. In the end, you pay for it as a consumer facing higher costs, poorer service, and the shrinking ranks of practitioners.
Lewis Walker, CFP®, is a financial planning and investment strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Capital Insight Group. Lewis Walker is a Gallup Certified Strengths Coach and a Certified Exit Planning Advisor (CEPA®).