The “Fiduciary Rule” – what it might mean for you...

Editor's Note: As of May, 2018, the so-called Fiduciary Rule seems to be permanently on hold. Financial companies have successfully sued to stop it; the Department of Labor is choosing not to defend it; and the courts have declined to give the States standing to pursue the matter. We may write a new article discussing this important subject matter in the future. In the meantime....  Blair Hall Advisors continues to function as a fiduciary for all our clients always. Our original article remains below.

"Increasingly friends and clients have been asking us, 'Tom and John, what does this new so-called ‘Fiduciary Rule’ mean for me and other investors?'

If you’re a client, there’s no impact

If you’re a client of ours, the answer is that nothing changes either way. As a Registered Investment Adviser (RIA) firm, Blair Hall Advisors is already required always to act in our clients’ best interests. Period. No exceptions. Furthermore, we are compensated only from client fees, never from commissions or hidden incentives, minimizing the possibility of conflicts of interest. The fiduciary rule doesn’t change that at all.

If instead you’re a client of one of the large Wall Street brokerage firms, or a smaller brokerage, the fiduciary rule does make some difference, although we question how much.

First problem with the rule: Limited scope

First, the rule only affects retirement accounts: 401(k) accounts, IRAs, Roth IRAs. If you have any other kind of investment account, even with the rule in place, brokerage firms (such as Merrill Lynch, Morgan Stanley, UBS or others) are still free to give you advice at a much lower standard of duty. The so-called “suitability standard” applies to broker-dealer firms, which is synonymous with “brokerage” and is the legal category for the large Wall Street companies and many regional firms as well. 

Under this “suitability standard,” the broker-dealer firms, for example, are required to be slightly thoughtful about whether to invest your money in stocks versus bonds; however, they do not have to use the best investments available to the firm. For example, broker-dealers can use more costly or worse-performing investments if it brings in more revenue for the firm or if it benefits compensation for specific staff members. Nor do the brokerage firms have to be especially thoughtful at allocating within stocks or within bonds. It can be considered “suitable,” for example, if all of the stocks in your portfolio are in one or two sectors; same with the bonds. The investments don’t even have to be well-diversified! We think this is outrageous.

Meanwhile, RIA firms such as Blair Hall Advisors always maintain the higher “fiduciary standard” across all account types, both retirement and non-retirement. 

Second problem: “Financial advisor” education, training and skill level

Second, even to the extent that the fiduciary rule might apply (regarding retirement accounts), we’re not clear that most so-called “financial advisors” at brokerage firms have the competency and training needed to deliver a fiduciary level of care. Being a fiduciary requires both a duty of loyalty AND a duty of care. Trying to act in a client’s best interest is one thing (i.e., being loyal), but without high-quality advanced training—such as we have at Blair Hall Advisors—a brokerage firm “advisor” may not be able to deliver the duty of care.

In fact, “financial advisors” at brokerage firms (and also at some RIAs) are often not even required to have a college degree. They are salespeople who passed a set of multiple choice tests once, at the start of their career, and since then have been measured primarily by their companies’ revenue targets. The brokerage industry regulator, FINRA, who the brokerage firms sponsor and administer themselves (with modest SEC input), allows these salespeople to put “financial advisor” on their business cards without meeting any academic standards or requiring any advanced education. Yes, this also is outrageous.

We encourage all investors to scrutinize their “financial advisors’” level of training and academic background to ensure their wealth is being managed by highly educated, highly trained practitioners.

In Conclusion

In conclusion, we believe it’s a dubious situation at best whether brokerage firm clients can expect to receive financial advice that’s truly in their best interest, even with the new fiduciary rule. We don’t believe the fiduciary rule has a broad enough scope, since it’s limited to retirement accounts. Nor could any rule magically all-at-once add advanced training and expertise throughout large firms’ tens of thousands of salespeople (“advisors”).

Blair Hall Advisors would like to see even more stringent fiduciary requirements imposed on the broker-dealers; the scope of the rule (or added rules) should be expanded to include all account types. Further, challenging educational and training requirements for anyone who has “financial advisor” as their job title are needed, for both broker-dealers and RIAs.

In the meantime, it seems clear to us that clients will receive the best possible care by working with Blair Hall Advisors or another RIA firm with exclusively highly-trained advisory staff."

Please contact us to learn more about Blair Hall Advisors, including other ways our service is distinctive.