How the Expanded Definition of “Fiduciary” Impacts Your Investments in 2017

Jeffrey Abadie

There has been great controversy lately about regulatory changes impacting the financial industry.  One set of new rules in particular - the Department of Labor’s extension of the fiduciary standard to all those companies and agents providing services and advice to investors on their retirement assets -  has generated both action and debate.  DOL became responsible under ERISA, the Employee Retirement Income Security Act, passed in 1974, for regulating employer sponsored retirement plans. This new rule affects advisors to both these plans and investors changing companies or retiring and contemplating a rollover to an IRA. The changes will require costly and significant changes in the way financial services companies do business, and many banks, brokerages, and other distributors of investments would like to see the Trump administration reform, delay or scrap the new rule.

Stepping back for a moment, we acknowledge that the ethical responsibilities of financial advisors are not always clearly understood.  Some advisors offer investment management and advice for a fee, while others sell products and are paid a commission.  To add to the confusion some advisors do both, putting on different “hats” under various circumstances.  In general, fee-based advisors, specifically those employed by Registered Investment Advisory companies (RIA for short), like Sand Hill, adhere to the fiduciary standard while those who accept a commission to purchase investment products are subject to the suitability standard. Banks, investment brokerage firms and insurance companies distribute investments and their agents are paid to do so.  The essential difference between the two standards is the fiduciary standard is unlimited.  It requires that fiduciaries do what is best for their clients at all times, so investments made on behalf of their clients must not only be “suitable” with respect to clients’ financial means, goals and risk tolerance, but also must be judged on the basis of quality, performance, liquidity, and all associated costs, among other attributes.  All of this is not to say that the vast majority of professional advisors do not try to do what is right; and yet, incentives clearly can confuse the issue. Simply put, the suitability standard does not require advisors to recommend the best vehicles, only an appropriate one. DOL’s expanded fiduciary standard impacts all providers of retirement plans, having seen abuses under the suitability standard.  Effective in April 2017, advisors managing or advising individuals or retirement plan sponsors (401K, 403b, and qualified pension and profit sharing plans) must operate as fiduciaries.   Those recommending rollovers from employer sponsored qualified retirement account into IRAs must also abide by this high standard.  So, if you have IRAs or other personal accounts managed by a broker or advisor who is paid a commission, sometimes or routinely, then be aware that the suitability standard will apply.

No one knows whether the Trump administration will relax, delay or even eliminate DOL’s rule.  Changing an existing rule is difficult; however, if the government failed to defend the many lawsuits already launched, or didn’t provide funding to support enforcement, then this could compromise the rule.  Regardless, investors should take this opportunity to confirm the standards to which their advisor is held.  Sand Hill operates exclusively as a fiduciary so regardless of the ruling outcome we will continue to provide unbiased advice and investment management as we hold ourselves to the highest standard of care in the financial services industry.

This information has been developed internally and/or obtained from sources that Sand Hill Global Advisors, LLC (“SHGA”), believes to be reliable; however, SHGA does not guarantee the accuracy, adequacy or completeness of such information nor do we guarantee the appropriateness of any investment approach or security referred to for any particular investor. This material is provided for informational purposes only and is not advice or a recommendation for the purchase or sale of any security. This information reflects subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. This material reflects the opinion of SHGA on the date made and is subject to change at any time without notice. SHGA has no obligation to update this material. We do not suggest that any strategy described herein is applicable to every client of or portfolio managed by SHGA. In preparing this material, SHGA has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you should consider, with or without the assistance of a professional advisor, whether the information provided in this material is appropriate in light of your particular investment needs, objectives and financial circumstances. Transactions in securities give rise to substantial risk and are not suitable for all investors. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.