The Labor Department issued new rules in April on how financial advisors handle their clients’ 401ks and qualified retirement accounts covered by the Employee Retirement Income Security Act (ERISA). After years of clashing with big Wall Street firms that tried to stop the new regulations from going into effect, the government successfully passed rules that require all financial advisors to act in the best interests of their clients, not themselves, when dealing with retirement accounts. We, at Nelson Roberts Investment Advisors, welcome the new requirements since this is the way we have always done business.

The new rules highlight an important legal difference between stock brokers and registered investment advisors. As registered investment advisors, we are held to a fiduciary standard for all services and advice we provide to our clients. In other words, we have always been legally obligated to put our clients’ best interests ahead of our own. This will be the first time that stock brokers are held to the same standard, although for brokers it will only apply to ERISA accounts. We believe the regulations should apply to all accounts.

Stock brokers are held to a “suitability” standard of care when managing client’s assets. They are not required by law to offer the “best product,” only a suitable one. A broker’s objectivity could be easily clouded when making a recommendation between two investment products if product A pays a higher commission to the broker than product B. As long as product A is deemed “suitable” for the client, the broker can justify the higher commission. But under the new rule, brokers will be required to put their clients’ interests first when managing ERISA accounts, eliminating the conflicts of interest that come from the current form of compensation. Stock brokers will continue to be regulated by the Financial Industry Regulatory Authority (FINRA) in contrast to registered investment advisors, which are regulated by the Securities and Exchange Commission (SEC).

The new rules go into effect April 2017, but they are already having an impact on financial firms. Rather than comply with the new standards and the higher cost of compliance, many large banks and insurance firms are exiting the wealth management business or no longer selling annuity products. Barclays, Credit Suisse, Wells Fargo and AIG have all announced such changes to their businesses.

Supporters of the new fiduciary law say it will protect investors from high-fee products that are recommended by advisors, but there is still a wide difference between how registered investment advisors and stock brokers care for their clients. The new regulations are a good first step, but we do not believe they go far enough. The fiduciary standard should apply to all client interactions.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.