- In this second article of our Trump Series we are going to focus on the Department of Labor (DOL) Fiduciary Rule (“Rule”). Earlier this month President Trump ordered a review of the rule, which was scheduled to go into effect on April 10. The Presidential Memorandum ordered the DOL to examine the Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.
- We will not be speculating on the probability of implementation of the Rule or taking a political stance. We will do our best to provide our perspectives on the issues surrounding the Rule.
- The general premise of the Fiduciary Rule is that it requires investment advisors to act in their client’s best interest with respect to retirement accounts such as IRAs and 401(k)s. Right now, some advisors are only held to a suitability standard, which simply states that the advisor must have a reasonable basis for a recommendation. https://www.sec.gov/answers/suitability.htm
- On the surface the comparison is straightforward. As usual, the details are much more difficult. Over the past four months two lengthy FAQs (more than 40 pages in total) have been released attempting to clarify the Rule. Those FAQs and more information on the rule itself can be found on the DOL website. https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2 It is a lot to digest.
- What do individuals need to know about the Rule? What should individuals do to protect themselves regardless of the Rule being put in place?
- We believe it is fair to disclose that Entasis Asset Management is a registered investment advisor. The advisors at our firm operate according to the fiduciary standard. It is our duty to act in the best interest of our clients. Each of our founders is also a CFA charterholder, which means we commit to a strict code of ethics and standards of professional conduct. With that context, we believe every investor should know a few key things about the rule and working with an investment advisor.
- Ask for an Investment Policy Statement. At the core, the Rule is designed to protect investors from getting poor advice or put into investments that while suitable may not be in their best interests. All investors should regularly ask for clarification on recommendations and ask for an investment policy statement (IPS). The IPS puts the investment strategy that you and your advisor agree to in writing. We put one in place for all clients after a careful review of goals, objectives and risk tolerance.
- Define your needs. We think this is one of the easiest things an investor can do. There is some truth to the notion that “you don’t know what you don’t know”, but for the most part we recommend to clients to keep it simple. Many investors pay a fee that covers services never utilized. Understand the value a suite of services brings to your personal situation. Hire an advisor that offers services you need and pay a fee that meets those needs.
- Clarify compensation structure. This is perhaps one of the biggest elements of the Rule. In too many situations the fees clients pay are misunderstood or never communicated. Know how your advisor is paid. Ask your advisor to summarize their compensation structure and estimate what your fees will be. Costs should never by opaque. Demand transparency.
- In summary, make the process of working with an investment advisor a priority. It is an important decision. Do your homework. An ethical advisor that puts your interests first will not be afraid of any of the questions and will appreciate your involvement. We have developed some helpful tools in our Resource Center. https://entasisam.com/choosing-an-advisor/ Check them out. If you are not currently working with an investment advisor, please contact us today.