Fiduciary Rule; Fiduciaries Rule

7/18/2017

The Department of Labor (DOL) Fiduciary Rule has garnered much media attention since it was first proposed several years ago. While the media has scrambled to understand the Rule and pen compelling articles and blog posts, an equal amount of confusion has developed. While this letter is not the appropriate source for a detailed look at the ruling that took hold on June 9, 2017 (and is still in a comment period that may change the Rule), we point out the primary concern regarding the issues.

In summary, the Fiduciary Rule requires that all advisors and brokers act as fiduciaries when making recommendations and giving advice on IRAs and qualified retirement plans (e.g., 401k plans). Prior to the Rule, only Registered Investment Advisors, such as ourselves, were held to a fiduciary standard while brokers worked under a suitability standard.

A “fiduciary” is a term for an individual who has a legal or ethical duty to act in the best interest for another. Under the DOL’s rule, when a financial professional provides investment advice or recommendations to an IRA owner or an employer-sponsored retirement plan participant (e.g., 401k plan) and in doing so receives compensation, the financial professional must put the client’s best interest ahead of his or her own.

The fiduciary standard, in which Monument has always legally been required to practice due to our operational structure of choice (being solely registered with the SEC as a registered investment advisor rather than as securities brokers with FINRA), is a much higher level of conduct and accountability than the suitability standard. The suitability standard was previously required of those “advisors” working for brokerage firms, banks and insurance companies as well as many independent advisors registered with the SEC and affiliated with a brokerage firm and “advising” on retirement plans.

“Suitability” means that the broker is allowed to sell an investment that was suitable (i.e., met a client’s need and objective), but was not necessarily in the client’s best interest. In other words, under the suitability standard, the broker could sell a client a product that paid the broker a higher commission than a similar product that would have also been suitable and would have been at a lower cost to the investor. Hence, the advisor would have been putting their own personal interest ahead of the client’s interest by selling the client a product that lined the broker’s pocket. The DOL Fiduciary Rule has replaced the suitability standard for retirement accounts.

Caveat emptor, the DOL Fiduciary Rule only applies to retirement accounts and not other investment accounts that are “advised” on by brokers. Also, exemptions may be available to brokers so long as they disclose the conflicts of interest to the investor.

Again, since Monument is organized as a registered investment advisor, we have been legally obligated to practice as fiduciaries since the founding of the firm.

While there may be an additional administrative burden on Monument’s end (particularly with new clients holding retirement plans), the Rule will not impact our clients or our firm. In the end, we believe the Rule is a step in the right direction for investors.

If you have any questions regarding your portfolio report or the other items, please be in touch. As always, we welcome your suggestions and feedback and we value your trust and confidence.

Sincerely,

Byron E. Woodman, Jr.                                  Lee C. McGowan, CFA, CFP®

President                                                          Managing Director