Need financial advice? New federal legislation protects investors

By Cam Goodwin, COO & Managing Partner | Guest Columnist for the Nashville Business Journal

Cam 2-16One has to believe that the rippling response and critical acclaim of last year’s “The Big Short” movie had less to do with acting and more to do with the possibility that Wall Street plays by its own rules at the potential peril of investors.

It seems the film must have hit home with the Department of Labor, because in April of this year, they published their long-awaited fiduciary definition, succinctly titled: “Definition of the term ‘Fiduciary’; Conflict of Interest Rule — Retirement Investment Advice.”

In an overview of the DOL rule and its implications for advisers and investors,Scott Cooley, director of policy research with Morningstar, quipped, “Where you and I would have said ‘act in your client’s best interest,’ the DOL generated a manifesto that runs to more than 1,000 double-spaced pages.” Here’s a breakdown into something more digestible:

What does the rule mean?

In its most concise definition, the DOL’s fiduciary rule applies a client-first policy for those who provide professional advice on retirement accounts, including IRAs and 401(k)s. That means that all advisers are now obligated to document and support their investment advice and recommendations to ensure they were delivered in the best interest of their clients.

This ruling, in our opinion, is a much needed development for an industry that has been resisting fiduciary responsibility for quite some time. While Registered Investment Advisors have always maintained a fiduciary responsibility, current brokers that serve broker/dealers are only required to provide “suitable recommendations” at the time of an investment product sale.

Suitable can mean a lot of things, but it does not always mean that an adviser made his or her recommendation based on your short- and long-term financial needs. In fact, a non-fiduciary adviser — prior to now — was under no obligation to disclose how he or she was compensated. And because they had no reporting obligation, the products they chose may have been more aligned with the broker fees associated with the investment, rather than the long-term retirement benefit for the client.

Impact on 401(k) plans

The DOL ruling will effectively put a stop to just anyone selling company retirement plans for which they have no long-term fiduciary responsibility. Prior to this crack down, HR and finance departments could be sold plan packages for which the adviser had no management, measurement or performance obligations. It’s not hard to see how this lack of accountability could have a negative impact on a company’s benefits and ultimately hurt the people for whom the package was supposed to be of future value.

With the boomer generation nearing retirement on a large scale, this new accountability requirement for retirement plan advisers is critical; particularly as it pertains to rollovers from 401(k) plans to Individual Retirement Accounts.

Again, according to Mr. Cooley’s report: “In the past when brokers only needed to meet a suitability requirement, they frequently persuaded investors to roll money out of low-fee 401(k) plans to higher fee IRAs.” While on face value this may seem like a good strategy at the time, investors did not realize that their advisor may be basing his or her decision on their own compensation.


The DOL’s ruling begins to level the playing field for financial professionals, and subsequently, investors. At the same time, investors have a responsibility to understand the true nature of their relationship with their financial adviser.

If the adviser’s fiduciary commitment is not evident and completely clear, you need to do some research. While the new ruling is in place to help make all advisers more transparent about their compensation related to the products and services they sell, investors also have a responsibility to understand the financial dynamics of the relationship.

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