Episode I: “Fiduciary” is Now Nothing More Than a Marketing Buzzword

I’ve been talking about the problem of fiduciary responsibility when it comes to financial advisory practices for a while now. In fact, the many different ways that advisors can get around the “fiduciary requirement” is what led me to found Verbatim as a flat-fee advisor. The word “fiduciary” in advisory is meaningless unless you can be assured that the person advising you will be acting only in your best interest.

Let me be clear. If an advisor can be paid by a third party for “recommending” (read: selling) certain products, there is no way for you to be sure they are acting in your best interest.

Beginning today, the SEC’s Regulation Best Interest goes into effect, and the Department of Labor followed suit to change its fiduciary rule to synch up with the SEC.

I’ve copied the most important changes below, along with more in depth articles on the subject, but I can tell you that in my opinion, the result is the transformation of the word, “fiduciary” from something to be sought out when evaluating potential advisors, to a mere marketing buzzword. Asking the question, “are you a fiduciary?” or “will you sign a fiduciary oath?” is less meaningful than ever.

These changes, combined with the move by the Certified Financial Planner Board of Standards’ decision to remove information from the CFP website earlier this year, make it even more difficult for a consumer to choose a financial advisor.

How can you be best assured that an advisor is acting in your best interest? Find one whose business model doesn’t allow for conflicts of interest. Find an hourly, or flat-fee, retainer based advisor whose fees are clear. You can not rely on government regulators or independent industry boards or designations like CFP to protect you.

DOL Revises Its Fiduciary Rule To Allow Third-Party Compensation

“A new U.S. Department of Labor fiduciary rule will allow advisors to continue receiving compensation from third parties for the sale of investment and insurance products.

The DOL issued a revised fiduciary rule on Monday to harmonize its policies with the Securities and Exchange Commission’s Regulation Best Interest (Reg BI).

The revised rule will allow financial advisors to receive many payments that would have been restricted or forbidden by the previous DOL rule, including commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue-sharing payments from investment providers or third parties, even within qualified plans and IRAs.

Like Reg BI, the DOL’s rule requires disclosures of conflicts of interest, but does not require advisors to avoid them altogether.”

What Regulation Best Interest Means For Your Financial Advisor

“At first look, Regulation Best Interest may appear to aid consumers and impose consistency throughout the financial services industry. But the regulation has met with mixed reviews from some quarters.

U.S. Sen. Elizabeth Warren spoke out against Regulation Best Interest in 2018, saying it could be more effective if it enforced an actual fiduciary standard on brokers, rather than the looser “best interest” language used in this new regulation. Warren also called for a ban on sales contests and quotas at brokerages, which could encourage employees to make suboptimal recommendations. The final regulation doesn’t include any of these provisions.

Thomas Meyer, CEO of Meyer Capital Group, a fee-only investment management and financial planning firm, says Regulation Best Interest is a step in the right direction. But Meyer warns that it still puts most of the responsibility on customers. Although disclosures will be mandatory, he doesn’t believe most people will actually read them.

“Most of the verbiage is in Form ADV and the prospectus,” Meyer says. “No one ever reads a prospectus.”

Geoffrey Brown, CEO of the National Association of Personal Financial Advisors (NAPFA), is even more critical. Brown believes Regulation Best Interest’s disclosures are too subjective and potentially misleading.

“The SEC had a real opportunity to address conflicts of interest and lax investor protection,” Brown says. “But the rulemaking package is based on what we consider a new, misleading and undermining ‘best interest’ concept. You have disclosure obligations … but it also sets us up for this dynamic of just disclosing the information and making it all OK.”

What’s more, there is little clarity on how Regulation Best Interest addresses edge cases, such as when financial professionals work as both RIAs and brokers. Some argue that could lead to customer confusion regarding which hat their financial advisor may be wearing—RIA or broker—at different points in their relationship.

Seven attorneys general sued the SEC in 2019 on grounds that the agency was required to impose a higher standard of fiduciary care on broker-dealers, but doesn’t. Some states are moving to implement stricter rules of their own.”