Department of Labor Fiduciary Standard Rule
Department of Labor Fiduciary Standard Rule
Some of you may have heard the discussion on the news lately of the Department of Labor (DOL) Fiduciary Standard applicable to financial advisors. We have been asked by clients recently if we are a fiduciary for them and we have been happy to say YES. We thought we’d let you know what the discussion is generally about as well as why these developments are not likely to change the way we work with the majority of our clients. First, we have to explain our account types.
A Brokerage Account is an account whereby the advisor is held to the suitability standard for the client, which means the advisor must know the clients and their financial situations, and recommend products that are suitable for their situations today. Typically, the advisor investing clients’ assets through a Brokerage Account is compensated through commissions on sales in a brokerage account platform.
An Advisory Account is an account where the advisor is held to a higher level of care, known as a fiduciary standard. The fiduciary must put clients’ needs first in all matters and avoid conflicts of interest at all costs. Since conflicts inevitably occur, the advisor must make sure to clearly and accurately disclose any potential conflicts, as well as how the advisor will maintain impartiality in light of these conflicts. All products or account changes recommended by the advisor must not only be suitable for the clients today, but also for their ongoing financial situation. The work as an advisor investing clients’ assets in Advisory Accounts is typically compensated as a percentage of the overall account value (“fee-based”).
The intent of the DOL Fiduciary Standard appears to be focused on moving more clients and advisors from the transactional nature of the Brokerage Account to the advisory relationship.
We at Cornerstone have always preferred the Advisory Account model that puts us on the same side of the table with the client. Over 90% of our business is conducted in the Advisory Account model. And, all of our new accounts are opened as Advisory Accounts. Please know that even though our Brokerage Accounts are not subject to the fiduciary standard, we always act in our clients’ best interest.
We feel that the advisory business is more appropriate for today’s investment climate. As the market has been significantly more volatile the last decade, we need to be nimble and have the ability to make account changes more often if necessary. The Advisory Account allows us to do this at no additional cost to clients. We feel that our clients can potentially benefit from an advisory relationship in several ways, as the relationship marries the clients’ best interest with our account managing decisions.
Less conflict of interest
By charging a fee for services, instead of a commission for each product, we are placed on the same side of the table as you, our client. Our interests are aligned with yours, because as your account value grows, so does our compensation. If your account decreases in value, we are paid less. The fee-based relationship helps erase doubt in your mind that we are making an investment change to receive a commission or additional fee. Additionally, we are required to disclose all conflicts of interest to our clients which gives our clients even more information about our relationship.
Fee transparency
A fee-based setup allows clients to look at their statements and see how much they are paying for our services on the front page and not buried in purchase prices of investments. Sometimes commission payments can get confusing and clients often do not know what a purchase cost them, whereas advisory charges are more transparent.
More holistic wealth management
Because we are charging one overall fee for our services, we are able to offer clients additional services such as financial planning. The advisory model also enables us to provide more of a wealth management experience that examines a client’s whole financial life, rather than just a single account, including analysis on retirement plans, estate planning, analyzing financial risks, etc.
A stronger relationship
As a fee-based advisor, we have at least annual meeting(s) with our clients and stay in regular communication with them, rather than simply communicating when making a trade, contribution, or distribution. We are also available to you to spend the time necessary to advise you on your financial life and to be there alongside you as you make your financial decisions.
Ongoing investment management
In the Advisory Account, we can focus on the most optimal investment strategies, asset allocation, and ongoing modifications for our clients, without having to worry about transaction costs and commissions. Clients don’t have to think about whether or not they want to pay for a change in their account. The end result is that clients’ investments can be managed in the way that most benefits them.
The DOL Fiduciary Rule proposed changes to our industry as discussed in the news will have little impact on the way we do business at Cornerstone since we are already serving in the capacity they desire for the majority of our clients. Frankly, we welcome any change to our industry which results in greater transparency and service to clients.
Content in this material is for general information only and is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Cornerstone Wealth Strategies, Inc., a registered investment advisor and separate entity from LPL Financial.
