(April 9, 2016) The Department of Labor (DOL) released their fiduciary rule on April 6th, 2016. This rule will not affect the way Sunrise Advisors works with our clients. As a “fee-only” Registered Investment Advisor, we are fiduciaries for our clients 100% of the time. Since the firm’s founding in 1993, we have adhered to a strict fiduciary standard. We are steadfast in our belief that providing advice in the best interest of a client is not only common sense, but it is what investors should demand. When a client sits on the same side of the table as their advisor, has the same goals and receives conflict-free advice, everybody wins. At Sunrise Advisors, your success is our success. We are true partners in our advisory relationships. Please see our written “Fiduciary Pledge” here.
Fiduciary Rule: What Is It?
In short, a “fiduciary” must do what is best for the client (and not the investment professional or their firm). The DOL’s fiduciary rule now requires investment professionals to place the client’s interest first, rather than utilizing the previously-applied and weaker “suitability” standard, when advising on retirement accounts (this includes 401k plans and IRAs). Changes in the law will be disruptive for those that are not fiduciaries 100% of the time (this is approximately 95% of the financial services industry). Brokers, Wall Street firms, insurance agents, dually-registered advisors and many others must now change their business model and/or disclosure practices.
Fiduciary Rule: Where It Falls (Meaningfully) Short
A fiduciary rule is certainly good in “theory” – clients deserve full disclosure and conflict-free advice. Sunrise Advisors has long been a proponent of a “true” fiduciary rule. However, the recently-released rule has some serious shortcomings. The new rule is watered down and not full in scope. The lobbying arms of the big brokerage firms, Wall Street, and the largest insurance companies were able to influence the regulations. As it stands, the fiduciary rule misses the mark in the following ways:
- The rule ONLY applies to retirement accounts. A fiduciary standard is not universal and does not apply to non-retirement accounts (like brokerage accounts and Trust accounts).
- The rule’s provisions do not go into full effect until January 2018, giving providers of non-fiduciary advice time to “water it down”, find creative ways to bury disclosures in the fine print, or change the rule even further.
- Firms may continue to promote proprietary products. “In-house” investments are often more profitable for the firm and may not be the best choice for investors.
- Rather than having to make annual, separate disclosures about potential conflicts of interest, the rule allows these terms to be buried in an account-opening document. Additionally, existing clients of non-fiduciaries can provide “negative consent”, meaning a client automatically accepts the terms of the “updated” contract unless they proactively terminate the old contract.
- Best Interest Contact Exemption (BICE) – this “loophole” allows investment professionals to receive “otherwise prohibited compensation” if a contract states (in the finest of fine print) that the financial professional is adopting procedures to act in the client’s best interest. Essentially, a client is likely signing off to ensure they do not receive fiduciary advice. Through this exemption, it is “business as usual”. In our opinion, this is absurd and it makes a mockery of the new rule.
Fiduciary Rule: Are You Working With A Full-Time Fiduciary?
The ONLY way to ensure that you are receiving fiduciary advice at all times is to work with “fee-only” Registered Investment Advisor, like Sunrise Advisors. We believe the most conflicted professional is the one who can wear “two hats”, effectively turning off and on their fiduciary duty to clients at their discretion. Increasingly, these financial professionals are ‘dually-registered’ with both a broker-dealer and an advisory firm. Your financial professional is not a “fee-only” fiduciary for you at all times if:
- They may be paid commissions for the sale of insurance, investments, or other products.
- They may receive compensation from parties other than you, including a mutual fund company, insurance company, broker-dealer, or others.
- Their website or financial literature includes the disclosures about their firm, usually in the fine print, “Securities offered through (XYZ Financial), member FINRA / SIPC”.
- Their website or financial literature includes the disclosures about their firm, usually in the fine print, “(XYZ Financial) may only discuss and/or transact securities business with residents of the following states: ………….”.
- They may only adhere to fiduciary standards on retirement accounts (while not acting as a fiduciary on non-retirement accounts).
Additionally, the unwillingness of a financial professional to sign a fiduciary pledge, vowing to place your interests ahead of their own or those of their employer, is a tell-tale sign of a non-fiduciary.
Fiduciary Rule: What Might Investors Consider?
You deserve a full-time fiduciary. Given the choice, informed investors will always select a financial partner that places their interests first at all turns. However, the industry purposefully makes it difficult to determine a “true” fiduciary from a part-time or non-fiduciary. If you are working with a broker, trust department, insurance agent, or dually-registered advisor, you can do better. The new rules (as outlined in the 1,028-page document) may allow a financial professional to “turn off” their fiduciary duty through buried disclosures or when working with non-retirement accounts. This is disingenuous and is a disservice to all investors. Your financial future is too important to rely on guidance from someone with a competing interest or mandate.
Sunrise Advisors was founded on fiduciary duty, and the firm will continue to be a fiduciary at all times for our clients. If “true” fiduciary duty is the end goal, we believe the DOL’s 1,028-page rule could be condensed to a single sentence that is free from confusion, misdirection, and loopholes: “All financial advice must be given in the best interest of the client”. Period. End of story.
If you are curious about the fiduciary duty of your existing financial relationship, we are offering a complimentary “fiduciary review”. Our “fiduciary review” examines the legal responsibility of your financial relationship, looks at the costs (seen and unseen) of your investments, and uncovers any potential conflicts of interest you currently face. To obtain your free “fiduciary review” or explore working with Sunrise Advisors, please call us at (913) 681-0215 or email to email@example.com.