Retirement and Fiduciary Standards

There’s long been controversy about these two terms and how they should be applied. For millions of us already retired and for those of us with an expectation of eventual retirement, a basic understanding of their relationship might mean the difference between financial success and failure as the years pass.

My objective with this post is to increase your awareness of fiduciary standards and how they now apply to monies you may have in your retirement accounts, specifically money that has not yet been taxed as income to you.

I’ll start with a quick explanation of the term ‘fiduciary’. It defines a standard of behavior that applies to people whose profession involves a responsibility to those served by said professionals. For decades here in the US it’s applied to physicians, attorneys, certain members of the accounting profession, and architects. More recently, it has come to include, by statute, people who provide investment advice on behalf of Registered Investment Advisory companies.

In broad terms, it means that actions of behalf of ‘consumers’ by said professionals must be taken to serve the best interest of those served. If you have a legal issue that demands the expertise of legal counsel to assist you, the attorney you hire is bound legally to act in your best interest and not someone else’s best interest. It has also come to include a moral and ethical component to support the legal requirement.

Several years ago it was proposed that those of us in the financial services sector whose compensation derived from investment advice be held to a similar standard. In other words, instead of selling advice and financial products that would best serve our employers, that we should instead be held to a fiduciary standard that put our employers second behind the best interest of our customers.

Some of us welcomed this proposal since we relished the idea of rising to the level of physicians and attorneys in the grand scheme of things, and perhaps being compensated accordingly. The proposals came from the Obama Department of Labor even though our activities, whether on behalf of the consumer or corporate America, was mostly the purview of the Securities and Exchange Commission or SEC.

However, Wall Street firms disagreed and brought sufficient pressure to bear on the SEC such that the rules were watered down and essentially meaningless. It was deemed to be ‘under consideration’ which effectively said no new rules were to be implemented.

Then in 2016 the Obama administration proposed that financial advisors selling products or giving advice to clients about their defined contribution plans be subject to fiduciary standards. Think 401(k) plans. It was struck down by a federal appeals court in June of 2018.

In it’s place appeared a new rule to be enforced by the Securities and Exchange Commission. It essentially says that all broker/dealers must provide information to clients to include conflicts of interest and how they make money off their recommendations.

There was a loophole however that allowed brokers to pay commissions to agents for selling certain investments. This despite potential conflicts of interest. It raises the question of whether you’re working in the best interest of your client or the best interest of your employer.

The outcome of that was the declaration that certain so called financial activities that involved retirement accounts should and would be held to a fiduciary standard. But there are still restrictions on certain activities that restrict a qualified adviser from making certain recommendations that might, depending on circumstances, be in the clients best interest and also compensate the advisor.

The proposal would effectively grant exceptions to advisors from fiduciary standards. For example, if you were employed somewhere and participated in your employer sponsored 401(k) plan, and then decided to retire, what happens to the money in your 401(k)? Does it need to be moved to some other account over which you have more control? If you do it yourself and make a mistake, no problem. But if you seek advice from a 401(k) fiduciary because you want their expertise, and are willing to pay for it, under existing rules they cannot be compensated without violating the existing fiduciary standard.

Mindful that what I’ve written here is probably understood by virtually none of my readers, and nothing definitive is yet on the books, this is a much to help me understand the changing dynamics of retirement as it is to help you. My apologies if I’ve left you in the dark.

Tony Kendzior \ July 21, 2020