Do Right, Even When Things Get Muddy
By Chris Hostetler
In my spare time, I enjoy training for and running obstacle course races. These involve such challenges as crawling through mud, climbing over walls, and experiencing mild electric shocks. Fun, right? No, I’m serious, it is tremendous fun. But to you, this may sound crazy, so you’ll choose not to participate. That’s fine, it’s not for everyone. This is a voluntary challenge, and I have chosen to subject myself to it.
Similarly, we at Hilltop have accepted a challenge that many financial advisors eschew. When we became a Registered Investment Advisor one year ago, we took on a burden known as the fiduciary legal standard. This means that we must act in our clients’ best interests at all times, which is the rule for RIAs.
We strive for the fiduciary standard not because it’s fun, but because it’s the right thing to do. However, the Department of Labor is on the verge of enacting a rule that would change the way of life for many in our industry. When this goes into effect, financial professionals giving advice on retirement accounts must work in their clients’ best interests (i.e. the fiduciary standard). Without the new rule, many advisor relationships are based on a suitability standard – your advisor’s recommendations must be good enough, but not necessarily in your best interests.
The so-called Fiduciary Rule was slated to go into effect on April 10, 2017, but it has been delayed by the Trump Administration to allow the DOL more time to review it and suggest possible changes. For now, the new DOL rule is supposed to go into effect on June 9. We think the rule will be implemented that day essentially in its current form.
How do we expect Hilltop to be affected if and when the rule does go into effect? Not much. We’re already held to the higher standard, with or without the new rule. In fact, we have been holding ourselves to the higher standard even before going into the RIA world. In the future, we’ll have to include additional disclosures for certain transactions, but that should be the greatest direct impact on us and our clients.
But like a barbed-wire-covered mud pit, the new rule is expected to make things difficult for many in the industry. In fact, it already has, even before going into effect. Many firms have begun moving clients’ money from commission-based to fee-based arrangements, in which they could more easily be compliant with the new rule. In the future, advisors who mostly recommend insurance and annuities, which tend to pay commissions, may face substantially higher compliance costs and limited sales opportunities. And individuals are more likely to seek out lower-cost alternatives, which means some advisors could lose business.
It makes sense to use the fiduciary standard, doesn’t it? Shouldn’t your advisor work in your best interests? We believe so. But it’s easy for Hilltop to argue this, because we have built our business on long-term relationships and we view every client through our financial planning glasses. Our revenue doesn’t count on today’s sales.
We think the new landscape will be a good thing for Hilltop, because the general public will be aware of the important question of the standard of care. We’ll see how the market responds. At any rate, it doesn’t really change things for us – we want to serve our clients’ best interests, whether required or not. Whether you’re motivated by fun or ethics, sometimes you need to do things the hard way.
P.S. Thank you for reading Hilltop’s first perspective piece! This fiduciary stuff can be a little heavy. If you’re interested in reading more, here’s a pretty good summary of the rule and its impact on investors. And if you’re interested in getting a bit of exercise and mild electric shock, I’m always looking for teammates!