On June 9, a new rule was officially promulgated by the U.S. Department of Labor. The so-called “Fiduciary Rule” places a greater responsibility upon investment professionals who give advice on retirement assets to place their clients’ interest ahead of their own. The action was not without controversy, and was delayed for two months by the incoming Trump Administration. But in a somewhat surprising move, Labor Secretary Alexander Acosta allowed the rule to become effective.
Investors may not appreciate that the level of legal obligation pursuing the best interest of clients has heretofore depended upon the business model of the person providing the advice.
Christopher HopkinsThe Investment Advisers Act of 1940 imposed a fiduciary duty upon professionals acting as “advisers,” prohibiting deceptive conduct and requiring that advisers must always act in the best interest of their clients. This precludes an adviser, among other things, from selling products with high fees and commissions that would benefit the adviser to the detriment of the client.
Fiduciary advisers are registered with the state or the Securities and Exchange Commission (SEC), and are called “Registered Investment Advisers” (RIA). RIAs typically charge asset-based fees and do not accept sales commissions or other incentives. In this way, the interest of the client is clearly aligned with that of the adviser.
The other predominant framework is the traditional stockbroker or agent model, in which compensation generally derives from sales commissions or trailing residual payments.