Regulations on providing financial advice that is in the client’s best interests are not just limited to Australia, with the US imposing a new fiduciary rule from June this year on financial advisers providing investment advice.
In a move that was perhaps indicative of a global trend rather than one confined to Australia, registered investment adviser (RIAs) firms in the US who provide investment advice would be expected to adhere to the US Department of Labor’s (DOL) conflict of interest rule, or fiduciary rule.
Under the Employee Retirement Income Security Act 1974, it would automatically raise all financial professionals who worked with retirement plans or provided retirement planning advice to a ‘fiduciary’, meaning they would be legally and ethically obligated to meet clients’ best interests and meet certain standards.
A Morningstar report titled ‘Time for Independent Advisers to Shine: Your Role in the DOL Fiduciary Rule’ said all advisers, including RIAs who worked with retirement assets would be required to provide advice in the investor’s best interests, charge no more than reasonable fees, and avoid misleading statements.
The main enforcement mechanisms in the rule – the required contracts, disclosures, recordkeeping rules, and warranties – would not take affect until 1 January 2018.
Morningstar’s director of policy research in the US, Aron Szapiro said the new rules presented an opportunity for advisers to better inform clients on what the term fiduciary meant in plain English.
“Most people need to understand that ‘fiduciary’ means the adviser has to put the client’s interests first, while every other adviser has the ability to invest their clients in financial products that pay that adviser a lot of money,” Szapiro said.
As the general public was becoming better informed about the new rules through the media, they had begun questioning why it needed to exist in the first place, and were shocked to learn some professionals who called themselves financial advisers (brokers/dealers) were not necessarily required to act in their best interests.
“A lot of people expect to get advice that is in their best interest, particularly related to their retirement accounts,” Szapiro said.
“There’s increasing recognition that that wasn’t always happening because it wasn’t always required,” he said, adding there were certain relationships where the adviser was a fiduciary and others where they were not.
That was a “rude awakening” for some people once they discovered that, the report said.
