If you keep up with current events and what is happening in Washington, it is likely that you have heard about the Department of Labor’s Fiduciary Rule. Some of you may be curious about what exactly it is and how it could possibly affect you. Before we talk about that, let’s take a quick look at the spectrum of financial advice, and where Parsec lands on that spectrum.
RIAs and B/Ds
These two acronyms stand for Registered Investment Advisors and Broker Dealers. These are two different types of providers of financial advice. In 1940, Registered Investment Advisors were separated from Broker Dealers under the Investment Advisors Act of 1940. Consider that the United States had just emerged from one of the biggest stock market crashes on record a year or two prior. The goal of this new legislation was to eliminate potential conflicts of interest, when a financial professional might consciously or unconsciously provide advice not in the best interest of the client. However, these new rules did not apply to everyone! They only applied to a group of advisors that were Registered Investment Advisors or RIAs. To make things even more complicated, someone could be a Registered Investment Advisor at the same time they were associated with a B/D! Now, if an advisor is associated with a B/D, they are essentially an agent for that company. Very simply, think about your local home or auto insurance agent. They work for the insurance company, and you know their job is to sell you an insurance product. This is the relationship that all advisors who work for large banks and brokerage firms maintain. Their first priority is to sell the products of their employer.
Cue the Independent Broker Dealer
As mentioned previously, there are some advisors who are associated with both an RIA and a B/D. These advisory firms typically associate with an Independent Broker Dealer, which means that they are still able to sell products and receive a commission, or they can provide advice through the RIA and receive a fee. At the end of the day, these advisors are stuck with a decision, whether to sell the client a product, or to provide objective advice. Doesn’t it seem like it would be very difficult for an advisor to provide advice, then sell them a product based on that advice? It is like asking your barber whether or not you need a haircut. This is why it is extremely difficult, if not impossible, for an advisor to be a fiduciary if they maintain an association with a B/D.
So what is Parsec?
Since our founding in 1980, Parsec has only been a Registered Investment Advisor. We have never been associated with a B/D, nor have we ever received any commissions or revenue sharing from our recommendations to our clients. One of our core beliefs is that our clients should have complete transparency on our fees, and that there is never any question of what the total cost to work with us is. This means that we are a fee-only fiduciary that always seeks to serve our clients’ best interests as well as eliminate any conflicts of interest that could arise.
How does the DOL’s Fiduciary Rule affect RIAs and B/Ds?
The current fiduciary rule proposal affects retirement accounts, including 401(k)s and IRAs. If the rule is adopted, it will require anyone working with these types of accounts to show that their advice is in the best interest of the client, not just a “suitable” recommendation, which is the current requirement for B/Ds. We believe this is a step in the right direction for consumers, but must point out that if an advisor is a representative of a B/D they still are still considered an “agent” of their firm, and this rule only requires they act in the clients’ best interest with IRAs and 401(k)s. We believe the best outcomes occur when an advisor is able to guide a client in a fee-only advisory relationship. The proposed regulation (if it eventually goes through) will require very small changes to some of our processes for documentation purposes, but no changes to how we work with our clients. We hope this post leaves you more informed about why being a fiduciary is so important to us.
The Parsec Team