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What is the Fiduciary Rule and How Will Changes Affect You in 2020?

How Has the Fiduciary Rule Changed for 2020?

For many of us, financial talk is often confusing. And with recent regulation changes in ethical standards for financial advisors, it’s become even more so. If you’ve been following current events in the finance world, you may be wondering, “What happened to the fiduciary rule and how do the recent regulation changes affect my personal retirement plan?

What is the Fiduciary Rule?

The fiduciary rule was a proposed Department of Labor (DOL) standard requiring that retirement advisors be raised to the level of a fiduciary—and its purpose was to protect the financial interests of individuals over those of firms and brokers.

More specifically, the fiduciary rule would have required brokers and financial advisors disclose:

  • Any potential conflict of interest
  • All fees and commissions received for retirement plans and retirement planning advice

After the much-heated debate, the Fifth Circuit Court of Appeals essentially killed the fiduciary rule in 2018. It was scheduled for phasing in during 2017 - 2018 but met opposition from many non-fiduciary brokers and investment firms. They opposed the Fiduciary Ruling since stronger standards would mean lower commissions for their firms and brokers and higher costs for compliance.

New Laws for Registered Broker-Dealers in 2019

The Regulation Best Interest (Regulation BI) bill was approved by the SEC in June 2019. It establishes a standard of conduct for broker-dealers when giving investment strategy advice, such as retirement planning.

Overall, Regulation BI says broker-dealers may only recommend financial products that are in their customers’ “best interests.” The new standard is set to take effect June 30, 2020, and would require all registered broker-dealers providing financial advice to comply with each of the regulation’s four main parts:

  • Disclosure Obligation – Provide any material facts (i.e. commissions or incentives) related to the products or services they recommended
  • Care Obligation – Use “reasonable diligence, care, and skill” in recommendations
  • Conflict-of-Interest Obligation – Disclose or eliminate conflicts of interest
  • Compliance Obligation - Establish policies and procedures to comply with Reg BI

Regulation BI’s “best interest” clause sounds very similar to the department of labor's fiduciary rule. Indeed they are closely related, and some have labeled Reg BI as an alternate solution to the forgone fiduciary rule. But they are not the same.

Each of these regulations aims to heighten the standard and ensure fairer practices for everyday Americans who are working towards their retirement. However, they still fail to meet the ethical standards of the fiduciary oath and the required duty of fiduciary advisors like a CERTIFIED FINANCIAL PLANNER®.

Does Regulation BI Mean the End of FINRA’s Suitability Rule (and What it Would Mean for Your Retirement Plan)?

If you read the above and thought, “Who the heck is FINRA and what is the suitability rule,” you’re not alone. FINRA is the Financial Industry Regulatory Authority, and their “suitability rule,” as it’s known, currently sets the bar for broker-dealer ethics when giving retirement advice.

Ultimately, the suitability rule says broker-dealers must offer financial products that are “suitable” for customers in terms of goals, risk tolerance, age, etc. Not ideal products, not the best option for you, just suitable. Regulation BI builds upon that by adding some transparency measures. But with regulations in flux, the consumer might still be at risk.

With the adoption of the SEC’s Regulation Best Interest, experts wonder if the FINRA’s suitability rule may be phased out. That remains to be seen.

Reportedly, the two organizations are working together to create more uniform rules and enforcement processes. The heightened standards are a step in the right direction, but, understandably, retirees may still feel uneasy. You need transparency and consistency when it comes to your retirement investment plan.

The bottom line is, no other standard will protect consumers (and their retirement plans) like a fiduciary will. With ever-changing ethical standards and intentionally confusing language at play, you can’t afford to put your personal retirement plan at risk.

If you want an advisor who you can trust to put your best interests first, no matter what changes happen in the SEC, FINRA, or anywhere else--hire a fiduciary financial advisor.

Understand the different types of financial advisors and find your best-fit wealth management advisor.

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