May 18, 2016

On April 6, 2016, the Department of Labor issued new regulations that affect both retirement investors and advisers and provide for sweeping change within the investment industry. For the first time, brokers and insurance professionals offering retirement advice and services will be required to act as fiduciaries, bringing them up to the same standard of care as investment advisers. Simply put, this means that all professionals providing advice for retirement plans, IRA or other tax deferred accounts, and even health savings plans, will now be legally required to act in the best interest of their clients. Here at Clifford Swan Investment Counselors, these new regulations simply reinforce a philosophy and practice we have always held to our core: putting clients first.

The retirement landscape has been evolving for quite some time; over the past several decades we have seen dramatic shifts in how individuals plan and save for retirement. Pensions and other forms of defined compensation offered by employers, which are structured to provide reliable income in retirement, have decreased. Consequently, self-directed 401(k)s and IRAs have become more prevalent and investment risk has been transferred to individuals. Individuals are more responsible for making decisions about their financial futures than ever before, and the number of choices available to them has grown.

Yet, the regulatory landscape has not kept pace. The recently issued rules are the first major piece of legislation broadly affecting retirement investment advice since the 1970s. The new rules, which will be implemented in phases starting in 2017 with full compliance required by the beginning of 2018, aim to eliminate conflicts of interest brought about by certain compensation structures between clients and advisers. At Clifford Swan, we take pride that our fees are transparent, easy to understand, and aligned with your interests. For example, we do not earn commissions from investing your assets in products. We do not have anything to sell other than the investment advice we offer and the portfolios we build from assets we research, follow, and have the highest conviction about.

At Clifford Swan, we have been our clients’ fiduciaries well before the issuance of these new rules. We are registered with the U.S. Securities and Exchange Commission as a Registered Investment Adviser (RIA). Legally, all RIAs have been held to a fiduciary standard since the passing of the Investment Advisers Act of 1940. However, looking back even further, acting in our clients’ best interests has been at the core of our firm’s beliefs since its founding by A.M. Clifford in 1915. A.M. Clifford was a pioneer in our industry, stating that “An Investment Counselor... should place himself in a position to consider only his client’s best interests to the exclusion of every other consideration.” He articulated the fiduciary standard far before it was a legal obligation for investment advice. A subsequent firm leader, Philip V. Swan, carried these beliefs forward, stating in 1984, “We pride ourselves on delivering compelling, customized investment management and advisory services without regard to outside third party influences.” Further cementing our commitment to a fiduciary standard, our firm contributed to the founding of, and remains on the board of, the Investment Adviser Association (IAA),which promotes the highest industry standards.

Prior to the implementation of these new regulations, which will start to go into effect in 2017, the fiduciary standard has not been required nor embraced industry wide. Rather, many professionals have acted in accordance with a less stringent standard of suitability. Under this standard, professionals only have to fulfill a suitability obligation, which is defined as making recommendations that are simply consistent with the best interests of the underlying client. As long as an investment product sold to a client could achieve a desired outcome, a professional can sell it to the client, even if the product is suboptimal. We can liken this to buying a car. When you go to the dealership, all of the cars will likely get you from points A to B. They are suitable for your goal, but, understandably, the salesman may be incentivized to sell you the car he gets the best commission on rather than the one that performs best for the price (the optimal car for you). 

We are pleased that the new rules passed by the Department of Labor acknowledge that incentives exist in our industry to lead investors towards products that may be best for the adviser. The new rules do not eliminate these incentives, but will require that conflicts of interest be made transparent to clients. In other words, if a professional offers advice to retirement plans or IRA holders, he or she has to either avoid payments that create conflicts of interest or provide disclosure of the conflict according to specific guidelines outlined by the Department of Labor.

It is also important to note that, while the new regulations will affect retirement accounts, other investment accounts will not be covered. This is an extremely important distinction. For many clients, assets set aside in tax-advantaged accounts make up only a portion of their overall wealth and financial futures. Many individuals save for retirement outside of covered accounts like 401(k)s and IRAs. Additionally, clients often have important financial objectives outside of retirement that we contend deserve a fiduciary standard. They rely on all of their assets to provide for themselves, family members, future generations, and to aid charitable causes. Financial lives cannot be neatly separated into two buckets—retirement and not—and, consequently, advice on investing those assets should be based on the same overall principles.

Trust between clients and advisers is essential, and in the absence of trust, legislation must do. While we embrace these new rules, we find them somewhat superfluous in our daily work. As a firm with a 100-year legacy of making your financial future our top priority, these new rules neither change what we do nor the relationship we have with you, our clients. Our incentives have always been aligned; it is our pleasure to aid in your financial goals.

Download Article: New Retirement Rules Mirror Long-Standing Clifford Swan Principles

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