08 Feb How Much Do You Know About the Fiduciary Rule? Time to Find Out.
The rules have changed for professional financial advice. Do you know what’s now required? Take this WSJ quiz
By Suzanne McGee Copyright, Wall Street Journal
Feb. 4, 2018
Let’s say your financial adviser, who has a clean record, has won your trust with a series of compelling presentations, showing how he generated healthy returns for other clients like you. He has promised to manage your money as carefully as if it belonged to his family, with only appropriate investments. But did he use the magic word “fiduciary”?
If not, there is a chance that, regardless of what professional title he uses, he doesn’t hold himself to a fiduciary standard—meaning he isn’t obligated to always put your interests ahead of his own.
In some circumstances, some investment advisers are required only to recommend mutual funds and other products that are “roughly suitable” for their clients. By that standard, those funds could be more attractive to the adviser than to you, because of the fees he can earn if you buy them.
New Labor Department rules, which started to come into effect last year, require that in some instances you must be advised by a fiduciary. But Wall Street is pushing back, and the final definition of what makes someone a fiduciary remains contentious.
With all this in flux, what do you know about the fiduciary rule? Let’s find out…
INVESTING IN FUNDS
1. Being a fiduciary means that my financial adviser promises:
A. Never to let me invest in anything very risky so that I won’t lose money
B. Not to be a crook
C. To put my interests first and fully disclose any potential conflicts of interest
D. To help ensure I get access to all the best investments, and maximize returns
ANSWER: C. Financial advisers acting as a fiduciary can’t work magic. They do promise that your dealings with them will be in your best interests, not necessarily in the interests of the adviser or the firm.
2. In 2015, the White House Council of Economic Advisers calculated that Americans forfeit about _______ a year, or _____ percentage points in annual returns, as a result of advisers and brokers recommending funds and other products with relatively high costs and low returns, with hidden incentives being offered to those recommending those investments.
A. $17 billion and 2 percentage points
B. $19 billion and 1 point
C. $23 billion and 1.5 points
D. $17 billion and 1 point
ANSWER: D. It said American investors could be earning $17 billion more a year if all financial advisers were under a fiduciary standard. Wall Street disputed the figure. Earning 1 percentage point less a year could mean $10,000 in savings would grow to only $27,500 instead of $38,000 over 35 years.
3. The origins of the fiduciary standard primarily lie in:
A. The Securities Exchange Act of 1934
B. The Investment Advisers Act of 1940
C. The Employee Retirement Income Security Act (Erisa) of 1974
ANSWER: B. An investment adviser operating under the 1940 act represents the buyer and is paid by the latter to represent the buyer’s interests. A 1963 Supreme Court case, Securities and Exchange Commission v. Capital Gains Research Bureau Inc., held that Section 206 of the act imposes a fiduciary duty on investment advisers. The court ruled that an adviser “should continuously occupy an impartial and disinterested position, as free as humanly possible from the subtle influence of prejudice, conscious or unconscious.”
4. The new fiduciary rule, which began to come into force in mid-2017:
A. Requires advisers who make investment recommendations on clients’ retirement assets to do so as fiduciaries
B. Requires all stockbrokers and financial planners to register as fiduciaries
C. Means that your investment adviser can’t sell you insurance or any products on which he or she earns a commission
D. Prevents your investment adviser from committing fraud or making bad investment choices
ANSWER: A. The rule requires anyone advising you on your retirement accounts to offer the best investment options possible and to act as a fiduciary. Your adviser is still free to don a nonfiduciary hat when consulting with you on nonretirement assets.
5. True or false: When my financial consultant says he is acting in my best interests and is selecting suitable investments, he is acting as a fiduciary.
ANSWER: False. A fiduciary doesn’t select merely suitable investments, but the best available ones, with the lowest costs, and manages (while disclosing to clients) any potential conflicts. What is suitable, on the other hand, is open to interpretation, by the financial consultant/broker, the firm that employs him—and the arbitrator who will rule on any complaint you make. “Suitable” may mean just avoiding a bad investment, rather than selecting the best one.
6. Which of these provides you with investment advice under a fiduciary duty to place your interests first?
A. A registered representative
B. A financial adviser
C. A wealth manager
D. A financial planner
E. All of the above, always
F. All of the above, sometimes
G. Some of the above
H. None of the above
ANSWER: F. While anyone advising you on your retirement accounts is required to act as a fiduciary under the new rules, none of these titles should assure you that the advice you’re getting on other accounts adheres to the fiduciary standard. Indeed, these titles are often interchangeable: Over the years, many individuals who used to call themselves brokers and were also known as registered representatives have shifted to calling themselves wealth managers or financial advisers. (Some spell it advisors—there is no legal or regulatory distinction based on the spelling.)
7. True or false: The designation of Certified Financial Planner, or CFP, is meaningful if looking for advice and/or a financial adviser who is a fiduciary.
ANSWER: True. The CFP Board has ruled that Certified Financial Planner professionals providing financial-planning services must abide by the fiduciary standard. But to protect yourself in case of a dispute, it’s best to get that commitment in writing.
8. At present, the big push among many lawmakers and others with objections to the new rule concerning the fiduciary standard is:
A. To repeal any and all rules requiring anyone to act as a fiduciary
B. To harmonize the proposals and produce a single new definition and set of requirements
C. To toughen up the fiduciary standard and provide greater protection to investors
D. To get more input from the industry and study the matter for more years
ANSWER: B. Given that the Trump administration in its first weeks ordered the Labor Department to reconsider the rule, the SEC is pushing for a compromise. That has triggered fears among those who have argued the need for the new fiduciary rule that “harmonization” will lead to a watered-down compromise, especially given that Wall Street has resisted the idea for decades.
Appeared in the February 5, 2018, print edition as ‘Test Your Smarts on…the Fiduciary Rule.‘