Today, President Trump announced plans to undo the Department of Labor’s “Fiduciary Rule.” The rule was intended to protect investors’ retirement funds by holding all financial advisors to a “fiduciary standard,” meaning that the advisor’s actions must be in the best interest of the client at all times. Currently, advisors not registered with the SEC may dispense financial advice that is only held to a “suitability” standard. Often, these advisors are compensated for the advice they provide by earning commissions on the assets that they sell to their advised clients. This means that they can collect commissions and sell products to investors as long as they can deem the products “suitable” in some way, but they don’t have to be investments that are exclusively in the clients’ best interest.

Imagine a car salesman selling an expensive 2-seat sports car to a family of 5. The salesman, motivated by the high commission, justifies the sports car as “suitable” because it is a mode of transportation. A more optimal solution for the family would be a lower-priced minivan, but this would earn the salesman a lower commission. Acting only on a “suitability” standard, the salesman can sell the family the sports car because he does not need to act in the best interest of the family. Too often, we see prospective clients’ portfolios jam-packed with “suitable” yet inappropriate investment products such as annuities and insurance, which command high commissions for the selling broker. The Fiduciary Rule would have been a positive development for investor welfare.

Although advisors registered with the SEC have been held to a fiduciary standard since the 1940’s, brokers not regulated by the SEC can dispense investment advice without the legal obligation to act in solely in their clients’ best interest. We think it is crazy that any investor would let an advisor sell them something that is not explicitly in their best interest.

At Nelson Roberts Investment Advisors, we have always held ourselves to a fiduciary standard. We do not sell products or collect commissions. Our business model has always been to act in clients’ best interest.

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