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Understanding the New Fiduciary Standard for Retirement Accounts

Understanding the New Fiduciary Standard for Retirement Accounts

Ron Kelemen - Wednesday, June 15, 2016

By now, you may have heard of the “Fiduciary Rule” published by the Department of Labor (DOL) on April 6.  The thrust of the rule is to require that anyone who provides advice regarding IRAs and 401-k rollovers to adhere to the Fiduciary Standard.  Previously, this standard for advice applied to only employer-sponsored retirement plans, such as defined benefit pensions and 401-k plans.  The final details are still subject to some back-and-forth with Congress and won’t go into effect until January 1, 2018. You will no doubt hear much more about it, so we thought it would be helpful to explain the Fiduciary Standard and provide you some context.

 We have been a fee-only firm for many years now.  However, to this day we find that some current and prospective clients don’t quite understand what fee-only or the Fiduciary Standard really mean. 


Fee-only means fee-only, all the time, for all accounts.  Our revenue comes directly from our clients—not from product or brokerage commissions, finder fees, trail commissions, or revenue from related entities.  We are fiduciaries, not only for retirement plans, but for all other advice and type of account.  In recent years, the distinctions have become more blurred as brokerage firms entered the advisory arena. They often use the term fee-based, which always doesn’t mean fee-only all the time (more on this under the Broker-Dealer definition below).   

 Here are two standards, followed by who must abide by them. 

Two standards:

Fiduciary—(adj) Involving confidence or trust; (n) held or holding in trust for another.  In the financial world it means putting the clients’ interests first. The duty is to the client, not the company. 

Suitability—whether or not an investment recommendation is appropriate (but not necessarily the best) for an individual.  This is the more lenient standard to which those in the broker-dealer world are held accountable.


Two types of firms:

Registered investment advisor (RIA)—a person or firm that is registered with the Federal Securities and Exchange Commission (SEC) or the states to provide investment advice for a fee.  (That’s us:  The H Group, Inc. is the RIA, and we are Advisory Associates of it.)  The Fiduciary Standard applies in all instances, and full disclosure of all conflicts of interest must be disclosed.  RIAs operate on a fee-only basis all the time.

Broker-Dealer—a firm (typically called a brokerage firm) registered with The Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that governs all business dealings between dealers, brokers and all public investors. Many banks and insurance companies are also affiliated with broker-dealers to sell financial products.  Representatives of a broker-dealer sell products and receive commissions and trail commissions, and only the suitability standard applies. This also applies to in-house inventory and proprietary products manufactured by their broker-dealer.  Many broker- dealers also have created related RIA firms so that they can charge fees.  When they do, the fiduciary standard applies to that portion of their business.  For clients it may be difficult to know which standard is being followed.  Advisors who wear multiple hats are often referred to as fee-based advisors.


The DOL’s Fiduciary Rule is going to require major adjustments for broker-dealers and their representatives in the IRA marketplace.  However, they can still continue with business as usual on other business until the Fiduciary Standard becomes the standard for all types of accounts.  The RIA firms, such as ours, will have fewer adaptions to make, depending upon the final details of the rule.   We’ll keep you posted as the Fiduciary Rule is finalized.

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