New Exemption for the Fiduciary Rule

Posted on April 25, 2017 · Posted in Newsletters

The Fiduciary Rule

First off, helping people with their financial affairs as a fiduciary is nothing new.  It simply means that, under law, an advisor must hold the clients’ interest above its own in all matters.

Shoreline Financial Advisors, as a Registered Investment Advisor, already acts as a fiduciary.  We are registered with the SEC and under the Investment Advisors Act of 1940, the SEC requires all such advisors to act as fiduciaries with their clients.

So, what’s the big deal.

According to a 2015 study by Cerulli Associates, only 23% of assets are managed by registered investment advisors.  Therefore, 77% of assets are managed by ‘financial advisors’ or ‘wealth managers,’ who are actually brokers that have no legal obligation to act in their clients’ best interest.  A 2010 Forbes poll found that 75% of those questioned believed that the term ‘financial advisor’ implied a fiduciary duty.  It does not.

Lobbies and Big Money

Enter the Fiduciary Rule.  This was an attempt to impose on the financial services industry a fiduciary obligation when dealing with and managing peoples’ retirement accounts – 401k, 403b, IRA, Roth IRA, etc.  It seems obvious enough and according to the polls referenced above, the vast majority of people already thought they were in a fiduciary relationship with their ‘financial advisor.’

The problem with the rule is that it would force the financial services industry to change its practices and with the potential for lawsuits, more costly oversight of its salesforce.  In an industry built on sales rather than advice, they needed an out.  With powerful and well-funded lobbies, the brokerage and insurance industries got it – the Best Interest Contract Exemption (BICE).  Read it again.  It literally means being exempt from the contract to work in your clients’ best interest.

According to FA Magazine, “The exemption is the most sweeping form of relief from the most stringent parts of the rule. It can be used for any assets and products offered to retirement plan and IRA investors, as long as the advisor is providing non-discretionary advice.”  In other words, sign a piece of paper, within the pile of paperwork that is already required, and it is business as usual, no fiduciary obligation.

Delay or Rescind

Now the rule has been delayed with many in the industry hoping it will be rescinded altogether.  For us, with the BICE in place, the Rule has no teeth and may blur the line between advice and sales even further.  If you think you are working with a fiduciary, and the law implies that they should be acting as one, then a signature on a piece of paper (BICE) that most will not even read nor understand its implications should not exempt the industry from its obligation.