As CPAs, our raison d’être is to protect the public, to help instill trust and confidence in our corporate and public institutions. We are the gold-standard trusted advisor for our clients; we should act ethically, honestly, independently, and responsibly.
This “golden rule” is not followed by everyone who advises the public on financial matters. Some financial planners put their own self-interest before their clients’ needs. In many cases, clients have no understanding of the roles that financial advisors use and the compensation models they employ. The distinctions between “doing financial planning” and “working in the financial planning industry” are not clear to the public, as CPA Journal PFP columnist Edward Mendlowitz has pointed out to me.
The Department of Labor (DOL) has therefore proposed regulations that will put the interests of clients above the interests of advisors (Fiduciary, Conflict of Interest Rule, Retirement Investment Advice-Proposed Rule, Federal Register, vol. 80, no. 75, Monday, Apr. 20, 2015).
The fiduciary rule would define who is a fiduciary of an employee benefit plan under the Employment Retirement Income Security Act of 1974 (ERISA). Its mission is “to ensure the adviser is acting in the best interest of the advice recipient” (p. 7).
America stands on the cusp of the greatest wealth transfer in its history, principally from employers’ defined contribution plans to myriad self-directed retirement plans. The proposed regulation “would treat persons who provide investment advice or recommendations to an … IRA, or IRA owner as fiduciaries … imposing trust law standards of care and standards of undivided loyalty” (pp. 1, 3). Furthermore, “the proposed rule and related exemptions would increase consumer protection for plan sponsors, fiduciaries, participants, beneficiaries and IRA owners.” In other words, if you advise clients on how to spend their life’s savings, you will now need to act in their best interest, not yours.
Opposition to the Proposal
The new rules were first proposed—and blocked—in 2010; now the battle has begun again. The American Society of Pension Professionals and Actuaries (ASPPA) recently reported that several financial services executives predicted “dire consequences if enacted” (Nevin Adams, “Warren Calls Out Financial Services Firms on Fiduciary Rule Changes,” Feb. 12, 2016, http://bit.ly/1KHOS5J), and Financial Planning Magazine reported that “some lawmakers have proposed a blunter instrument to block the DOL’s proposal in the form of a rider that would simply bar the department from using its congressional appropriation to advance the rule” (Kenneth Corbin, “Washington Lobbyists Intensify Efforts to Derail DOL Fiduciary Rule,” Dec. 9, 2015, http://bit.ly/1VCkQRg). The magazine also reports that “a separate path to blocking the DOL’s proposal comes from a bipartisan group of lawmakers who have been developing legislation that … would include provisions that are more favorable to the industry.”
Naturally, implementing the rule involves a number of issues. For example, the new fiduciary standard apparently conflicts with the CFP Board’s Standards of Professional Conduct: “A fiduciary standard for CFP certificants … applies only when a CFP certificant is actually ‘doing’ financial planning, not merely for being a CFP certificant who works in the financial services industry.” This creates “problematic scenarios where a consumer hires someone with the CFP marks only to find out later that person wasn’t required to act in his/her fiduciary capacity as a professional” (Michael Kitces, “CFP Board Begins the Process of Updating its Fiduciary Standards of Professional Conduct,” Feb. 8, 2016, http://bit.ly/1UkWixz). How are individual investors supposed to know when advisors are working in their interests or not? What does the CFP stand for if this confusion continues unresolved?
The role of insurance agents represents another potential conflict. Many agents are captives of their insurance companies. As a result, there may be a conflict between the fiduciary rule and the laws relating to the responsibilities and obligations in an agent-principal relationship.
Our Voice, Our Leadership
The fiduciary rule will require serious changes to the practices of many in the profession, but that’s no excuse to ignore the urgent need for reform. PCAOB Chairman James Doty has argued that “it’s time again for leadership in meeting the demand of today’s markets and investors. Time for something more: Who among you will answer that call?” (“Keynote Address”, CPA Journal, July 2015, p. 41). CPAs should be leading the charge in support of the DOL’s proposal. It is a call for the protection of our clients and the public we serve.