What is a fiduciary? Why is this word important and subject to loud, arrogant arguments on Capital Hill? It isn't child hunger. It isn't healthcare. Yet, in April 2016, the Department of Labor announced a new rule called “The Fiduciary Rule.” The rule is still subject to litigation and Congress repeal, but if I had to place a bet, I would bet that it will stick.
But what is a fiduciary anyway? In relevant terms, it's when a financial advisor has an obligation to put your interests above theirs. Another approach would be a salesperson. A salesperson typically has an inherent conflict of interest and one with integrity must always balance a fair deal. A salesman must consider the balance between the commission paid and the cost the client incurs. A fiduciary must strive to avoid these conflicts of interests.
So, it makes sense that financial advisors should be fiduciaries, right? Yes, but there are indirect consequences of regulation. I'm seeing some of these consequences play out right now.
For example, one major financial-services company has requested that all of their clients move their accounts to a different strategy. Another major financial-services company rearranged the service model for all clients under $1 million. Most of the firms, however, are in a “wait and see” mode. They are letting their attorneys and business leadership figure out all of the options.
Regardless of how things play out, I believe you can expect two things in investment and financial related advice – major short-term disruption, and more fiduciaries and less salesman.
Hopefully, the end result is that this change will encourage more people to save for their future. Only time will tell if this rule will move American savers in the right direction.
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