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Fiduciary Standard Debate Enters New Phase

It's time to drop my annual F-bomb: Fiduciary.

The Certified Financial Planner Board of Standards has updated its Code of Ethics and Standards of Conduct. Starting Oct. 1, 2019, CFP® professionals must act in the best interest of the client at all times when providing financial advice.

This is the so-called "fiduciary standard," a topic that has been in the news since 2006 when the Department of Labor created its own rule for financial advisors.

What Is the 'Suitability' Standard?

As a reminder, the vast majority of brokers and insurance reps who sell securities products are held to a lower standard of care called "suitability," which means their recommendations have to clear the low bar of what is suitable, though not necessarily in your best interest.

The U.S. Department of Labor's fiduciary rule would have forced those overseeing the nearly $3 trillion in retirement savings to work in their clients' best interest. But it has been in limbo since the Trump administration decided to put it on ice, delaying it until July 2019. And a recent federal court ruling may actually nullify the rule outright.

Although most investment companies had already made changes to their industry practices to comply with the new rules, the DOL began facing legal challenges, including the discovery that they had overreached their authority. Although this challenge was struck down, the decision will be appealed in time.

The Securities and Exchange Commission Fiduciary Rule

However, the Securities and Exchange Commission proposed its own fiduciary rule late in April 2018. The SEC rule applies to both retirement and non-retirement accounts, regulates conflicts of interest and dictates who can and cannot call themselves a financial advisor.

The fear is that the SEC fiduciary standard is a watered-down version of the original idea. But that's not why the CFP Board decided to act now. The CFP Board's stand on fiduciary began "more than a decade ago," according to Richard Salmen, a CFP® professional and the chairman of the CFP Board of Directors. Back then, the fiduciary duty applied to those CFP® professionals who were providing financial planning services.

"We are raising the bar even higher now with a fiduciary standard that will apply anytime a CFP® professional gives financial advice," which should eliminate any confusion.

As the F-word enters another phase, here is an updated version of my "Questions to Ask a Financial Professional":

  • Are you held to the fiduciary standard? Get this pledge in writing and make sure that it applies all of the time and to all accounts.
  • How will I pay for your services? The adviser should clearly state in writing how he or she will be paid. The three methods are: fees based on an hourly or flat rate; fees based on a percentage of your portfolio value; and commissions paid per transaction.
  • What experience do you have? Find out how long the adviser has been in practice and whether he or she is CFP® professional.
  • What services do you offer? Some create a holistic financial plan alone and don't sell financial products; others may only manage assets and many do both.
  • Is there anything in your regulatory record that I should know about? Conduct background checks with the SEC, FINRA, NASAA and the CFP Board.

Working with a CFP® professional will ensure that your money is in the hands of an ethical and competent financial planner, giving you the confidence that all financial advice is given, and investment decisions are made with your best interest in mind.

A version of this article originally appeared in the Chicago Tribune.

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