Our Thoughts

FJY & The New Fiduciary Rule: Ahead of the Curve

As many of you may already be aware, a new rule for investment professionals went into effect on June 9th. We are now in the midst of a transition period that will end on January 1st of 2018, at which time the full force of the US Department of Labor’s new Fiduciary Rule will be in effect. The impact to FJY Financial will be minimal because we have always been held to similarly high standards of care. This, however, has not always been the case for many other investment managers.

This new Fiduciary Rule is a broad expansion of the definition of “investment advice fiduciary” under The Employee Retirement Income Security Act of 1974 (ERISA). Under the new rule, nearly all financial professionals who work with retirement planning and advice will be elevated to a full fiduciary standard of care. These professionals will now be ethically and legally bound to put the clients’ interests before their own in all matters pertaining to investment options in retirement accounts. The expanded language of the rule leaves no room for an advisor to conceal conflicts of interest or fees charged for products or services; and it now applies to any professional making a recommendation or soliciting a purchase in a retirement account, not just ongoing advisors.

The new rule requires that all advisors act solely in the best interest of the client. This is a higher standard of care as compared to the “suitability” requirements to which broker-dealers and some advisors have been classically held. Under a suitability standard, representatives are allowed to sell favored products for higher commissions and fees without any disclosure to the inherent conflict of interests that exist, as long as the investments meet the client’s objective. Under the new rule, such an investment would have to be proven to be in the client’s best interest and all fees and conflicts of interest would need to be disclosed before a solicitation could be made.

This new rule is fundamentally changing the way many investment managers do business. In order to sell a product that has a potential conflict of interest, the representative will now have to obtain a signature from the client on a Best Interest Contract Exemption. The intent is to dissuade the representative from engaging in unscrupulous sales, while at the same time educating the client about potential red flags that may be otherwise hidden in an investment proposal.

This New Fiduciary Rule has garnered wide support from the financial industry. Aside from a few very vocal brokerage firms, interest lobbies, and politicians working diligently to reverse it, the rule is receiving wide acclaim from many professional groups. The Financial Planning Coalition (whose membership is the CFP Board, the Financial Planning Association (FPA), and the National Association of Personal Financial Advisors (NAPFA) – all of which FJY Financial is affiliated with) has made public statements endorsing the movement to raise the standards of care. Many advisors and other investment professionals not engaged in commission-based sales are also voicing their support.

FJY Financial is a fee-only advisor firm that is proud of its long-standing commitment to always act only in the best interest of the client. While in the coming days and weeks you may receive a few required disclosures informing you that we are being held to this fiduciary standard, rest assured that it really is just business as usual for us, and your advisors here will continue working for you and your family’s best interests – just as we always have.

Matthew Hays, Associate Financial Advisor

This article samples heavily from an Investopedia live update weblog. For the latest information and an expanded discussion, follow this link to their website or reach out to your FJY Advisor with any questions or concerns!