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I was having a conversation with my colleagues the other day and remarked that it is not often in our lives that we can actually say that a change in regulation is actually interesting. Most regulations, while intended to benefit us, take a fairly circuitous, often unintelligible, route to get there, if they ever do. So, in light of that, in the spirit of full disclosure, I hereby declare to all of you that we are about to discuss financial regulations. However, before you trade this article for the sports section of the paper, I ask that you give me a chance to tell you about a change in regulation that is thought-provoking, and may have a dramatic effect on how many firms invest their client’s hard earned money in the future. I hope I have piqued your interest…

If you have been reading the financial news in the last six months or so you likely have seen that there have been significant developments in the Department of Labor’s (DOL) rules on fiduciary investing for accounts governed by ERISA. ERISA (Employee Retirement Income Security Act), includes any retirement plan, including many types of IRAs (Individual Retirement Accounts). So if you have a retirement account governed by ERISA, this development may affect those accounts, depending on how they are managed. In this article, I will cover what it means to be a fiduciary, how the mechanics of the rule will change how retirement advice is provided and lastly Baker Boyer’s stance regarding the fiduciary rule.

Having a fiduciary duty means that you are legally obligated to act in the best interest of another. In our Asset Management and Trust group and through our advisory investment accounts with D.S. Baker Investments, we have operated under this standard for almost 100 years. While it seems obvious that your investment advisor would be required to act in your best interest, there is actually another standard that has governed the brokerage industry for decades. The suitability standard used in the brokerage industry is based on the idea that a broker only must have a reasonable basis to believe that an investment recommendation is “suitable” for the client. This is a more lax standard than the “best interests” standard and make it more difficult to hold brokers accountable for investment recommendations they make to clients. For example, if a tailor was subject to the suitability standard he would only be obligated to tell you if the suit you tried on fit or not. If he had to operate under a fiduciary standard, not only would he have to tell you that it fit, but would be required to make sure that it looked good, was in style, and that you could afford the suit on your budget. While the tailor under the suitability standard might not be doing anything patently wrong by selling you a suit that fit, wouldn’t it be better for you if they made sure that the suit is right for you and appropriate for what you are trying to accomplish? That is the difference between the suitability standard and the fiduciary standard adhered to by Baker Boyer long before the DOL required it.

The impetus for the DOL requiring the fiduciary standard for investment advice on retirement plans is that they have grown increasingly concerned with the manner in which investment advice is provided to retirees, who are arguably the most vulnerable to bad advice. According to Investment Company Institute, retirement assets in the United States totaled $24.1 trillion in the first quarter of 2016. Those assets constitute a growing percentage of Americans’ total net worth and it is imperative that the advice given to those current and future retirees is thoughtful and prudent. On this, Baker Boyer and the DOL agree wholeheartedly.

Although the details of the new DOL regulations are numerous, the intended effects are fairly straightforward. The implementation of the fiduciary standard on retirement plans will not only require that advice given by investment advisors is in the best interest of the client, but will ensure that fees are disclosed and transparent and that if an advisor is compensated by commission that they sign a separate contract stating that they will act in the best interest of their clients to mitigate the conflict of interest inherent in that kind of compensation. The regulations will also protect the client by providing that clients can no longer be forced to waive their legal rights to bring suit against an advisor that fails to honor its fiduciary obligations. In short, the DOL regulations are designed to protect clients from bad actors, and have changed the standard by which an advisor’s actions and advice will be judged in the retirement plan industry.

It is our opinion that this is a good development for retirees and for financial institutions like Baker Boyer. Putting our clients’ best interest first has always been at the heart of what we do. While other institutions are scrambling to comply with the new rule, Baker Boyer has been ahead of the curve for decades. We will continue to monitor the implementation of the rule and can only hope the same standard is eventually adopted by more regulatory agencies to insure that all investment advice, not just retirement accounts, is subject to the fiduciary standard. Whether or not this discussion of regulations has been interesting I leave to your judgment, but the fact that it is an important development that benefits investors, especially those who are most vulnerable, is a certainty.

Peter Allen JD, CTFA

Peter Allen JD, CTFA

Executive Vice President | Asset Management