Originally published on Tahoe Daily Tribune’s website, http://www.tahoedailytribune.com/news/opinion/15276182-113/tahoe-truckee-market-beat-fiduciary-vs-suitability-standard
President Obama is pushing the Department of Labor to make some changes to the rules regarding retirement accounts.
He would like to see the industry standard for retirement account advisers raised to what’s known as the fiduciary standard.
Under current law, retirement account advisers can operate under what’s known as a suitability standard.
Obama wants all retirement account advisers held to the fiduciary standard, the highest in the industry. Under current law, the Investment Advisors Act of 1940, Registered Investment Advisers must operate under the fiduciary standard.
Obama is proposing that the Department of Labor update the Employee Retirement Income Security Act of 1974, known as ERISA, by requiring the fiduciary standard for all retirement plan advisers.
Advisers held to the fiduciary standard must always act in the best interests of their clients. Fiduciaries must avoid conflicts of interest and always be sure that their investment advice is made using accurate and complete information.
They also have to place trades using what’s known as the best execution standard, meaning they have to try to get fair pricing when trading for client’s accounts.
Brokers operate under another standard known as the suitability standard. The suitability rule only requires that investments being pitched are suitable for the client, in that they meet with their objectives and risk tolerance.
According to a recent article in Market Watch, a White House press release said that typical employees who roll over a $100,000 401k to an IRA at age 45 will see their account grow to $179,000 by age 65 if they use an adviser who operates under the suitability standard, but will see their account grow to $216,000 in the same 20-year period if they use an adviser who operates under the fiduciary standard.
The White House refers to brokers operating under the suitability standard as giving “conflicted advice.” The White House Council of Economic Advisers has estimated that conflicted advice costs Americans about $17 billion per year.
That doesn’t mean that brokers always do a worse job for their clients. I worked in the brokerage industry for many years before becoming an investment adviser, and most of the people I worked with were highly ethical.
Some brokers charge commissions and some charge fees. Most investment advisers work on a fee only basis.
You can usually tell whose side your broker/adviser is on by examining the fees charged on your investments. If your investments have front- or back-end fees, or high 12-b-1 fees, you may be paying part of that $17 billion.
It will be interesting to see how the debate over the proposed regulations will turn out.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
