Commentary: The Department of Labor finally revealed its proposed fiduciary standard rule on Tuesday after weeks of anticipation and speculation. The rule is intended to deter brokers from pushing “backdoor payments” and hidden fees in the products they recommend to clients.
Specific elements of the rule include imposing a fiduciary duty on brokers, preventing conflicts of interest and exposing excessive fees.
This issue has been at the center of debate among advisers and other financial professionals since February when the Obama administration announced that it would task the DOL with creating these new rules. On one side, there are advisers who fear this type of regulatory involvement. They believe it will further complicate things by raising administrative costs and creating more gray area in a regulatory environment already characterized by its lack of consistency. On the other side, many advisers have been waiting for this type of action aimed at leveling the playing field between brokers and fiduciaries.
I find myself siding with the latter group. If a person is going to portray him or herself as an adviser, they need to have some level of fiduciary duty to perform that role in the best interest of the client. Plan sponsors and individuals are often in the dark about the motivations behind the financial advice they receive. As the CFP Board showed in a popular ad where a DJ posed as an adviser, a new suit paired with the right haircut is sometimes all it takes to gain the trust of a new client
The rule will also play a role in how advisers get paid. Research shows that advisers are gradually coming over to the fee-based model. The new rule, if enacted, will most definitely act as a catalyst to speed up that transition.
Another positive component of this is that it gives a skeptical post-2008 public one less reason to mistrust the finance industry. Of course there’s still bitterness and cynicism lingering from the crisis, and rightfully so. However, I think the administration realized that those views were obstructing much of the middle class from adequately planning for retirement. As it stands, Social Security’s two trust funds will become insolvent by 2033. This means if Washington doesn’t get its act together, Gen X and Y could very well need to rely on themselves for the bulk of their retirement savings.
The rule, if enacted, will undoubtedly be tweaked over time, but it’s been a long time coming nonetheless. The DOL and the administration are taking a stand and looking out for the consumer. It’s an important continuation of their heightened oversight of the past few years.
Mark Tan is a Chicago-based financial advisor with Thrivent Financial, a financial services organization that helps Christians be wise with money and live generously