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The Why and What of the Fiduciary Rule

After six years of debate, the Department of Labor (DOL) finally rolled out its long-anticipated fiduciary rule that could impact how investors receive and pay for retirement investment advice. So what does this mean?

  • Higher standard of care. “Fiduciary” is a legal term. Essentially it means the customer’s interests must be the priority when any investment recommendation is made. Previously, brokers simply had to meet a suitability standard, which allowed them to recommend a product that would have given them a higher payout or commission, providing the underlying investment fit the client’s risk profile.
  • Lower fees and commissions. Many retirement plans were sold by brokers using high-cost investments. By requiring brokers to adhere to this higher standard of care, the DOL seems intent on helping small investors make cost-effective decisions and eliminate potential hidden fees when investing for retirement.
  • New paperwork. Brokers who previously received commissions will have to provide additional account agreements and detailed disclosures of his or her potential compensation. Brokerage firms can, however, offer a “best interest contract exemption” (BICE), which requires substantial additional disclosures while still permitting the payment of commissions.
  • Ways around the standard. The new rule still allows brokers to continue offering a wide range of advice to investors without meeting a fiduciary standard such as newsletters, media appearances and commentaries, and educational marketing materials.
  • Winners and losers. If the analysis is right, workers could find themselves with an additional $17 billion in their retirement accounts due to lower fees and commissions. This is likely to lead to an increase in the number of people who can afford retirement. The only losers would be broker bonus pools and commissions.

Brokerage firms such as Merrill Lynch, Morgan Stanley and Edward Jones, are likely to begin public relations campaigns over the next several weeks to explain the new ruling to their clients. Perhaps part of these communication efforts will be an explanation as to why they didn’t adhere to a fiduciary standard before.

So how does this new rule affect you? Well, it doesn’t. BlueSky Wealth Advisors, has been acting as a fiduciary since 1999, offering transparent, conflict-free advice that helps our clients’ achieve their long-term goals. We are proud to offer the highest standard of care in the industry, which encompasses all advice and actions made on our clients’ behalf.

If you know anyone that might benefit from our higher standard of care, please feel free to have them contact us.