On Wednesday April 6th the department of labor (DOL) announced a new fiduciary standard of care for brokers who provide retirement advice. Prior to the announcement commission based brokers were held to a less stringent standard of care, requiring only that advice or product offerings be “suitable” as opposed to “in the best interest” of the client. Many fought this decision every step of the way suggesting smaller clients would be adversely affected and compliance costs would sky rocket due to the change. For registered investment advisors like WealthShape, the announcement amplifies the message we’ve always had. For us, solely acting in a client’s best interest was never in question because we’ve been doing it all along.
Some believe that this rollout will take place with little fanfare, but not me. Over past few years, I’ve witnessed a change in the publics understanding of the complexities in the financial advisory landscape. Today, virtually all of the new clients coming to WealthShape come with a cursory understanding of the conflicted interests associated with product pushing brokers. You might say the industry was moving in the fiduciary direction anyway; the new rule just speeds up the process.
Of course there are exceptions
Best Interest Contract Exemption (BICE): Essentially, the same commissionable and conflicted interest practices that were permitted before are still permitted. Here’s the catch. The client must agree to a BICE contract, which provides appropriate disclosure and transparency about the products and compensation received. My only issue with this is that the contract is likely to get buried in the monotony of paperwork just like everything else. Therefore, it is really up to the public to educate themselves on what they’re actually signing.
Why it all matters
While I’m confident a great many investors eyes have been opened, I know that many are still in the dark on these concepts. This rule will be highly publicized in thousands of media outlets, but lets face it, the word “fiduciary” isn’t exactly a household term. At least now, when the topic turns to financial advice, a greater number of people will ask tougher questions.
It’s too early to tell the long-term implications. Heck, with a new administration, the rule could even be overturned, although I think it would be a hard sell. Retirement advice and in particular, qualified plans such as 401k’s and 403b’s are likely to initially fall under a greater degree of scrutiny. Key parts of the rule don’t go into effect until April of 2017, followed by a transition period through January 1, 2018.
All in, this paves the way for a greater standard of care. It demands more transparency from brokers and shines a light on the “suitability” vs. “fiduciary” delineation. There were caveats to the rule that I wasn’t the biggest fan of; the largest being it only applies to retirement accounts and not taxable investment accounts along with the best interest contract exemptions. However, while I and others like me believe a fiduciary standard should apply to all investment advice, this appears to be an important step in that direction.
Market Review Q1 2016
Following a rocky start to the New Year, most markets rebounded to end the first quarter of 2016 on a slightly positive note. The S&P 500 recovered during the last six weeks to post positive returns of 1.35% and emerging markets surged to a very strong opening quarter gaining 5.71%. US bonds also rallied with the Barclays Aggregate bond index up 3.03% for the quarter. US small companies and international developed markets finished in negative territory down -1.52% and -1.95% respectively.
Markets faced serious headwinds at the tail end of 2015 due to slowing economic growth around the world. Combined with rising interest rates, a strong dollar, and falling commodities prices, we faced a perfect storm of factors that ticked off a stock market correction. However, after falling by as much as 10.5% earlier in 2016, the S&P 500 gained 6.8% in March. Given the roller coaster ride we've had this year, the recent gains are a testament to the resilience of investors.
YTD=Year To Date performance through date listed above. Index Data: US Large Cap Stocks: S&P 500, US Small Cap Stocks: Russell 2000, Developed International Markets: MSCI World EX US Index, Emerging Markets: MSCI Emerging Markets Index, US Bonds: Barclays US Aggregate Bond Index
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By Tim Baker, CFP®
Advice and investment design should rely on long term, proven evidence. This column is dedicated to helping investors across the country, from all walks of life to understand the benefits of disciplined investing and the importance of planning.