Are you staying at the Hotel Independent?

Imagine you are traveling for a weekend stay at a hotel in San Francisco. You want the advice of the hotel’s concierge for your dinner reservations.

If you are staying at the Hotel Independent, you would know that the concierge’s recommendations are only in your best interest. She would explain this to you. You told her your goals were to go to an Italian restaurant and a Steakhouse where you would have the best overall experience. Each restaurant should have the right balance of great food, wine list, value and atmosphere. She was clear with you that she would not be compensated by the restaurants for providing her advice. Her only compensation was a fee you paid her, so you know that she will have your best interest in mind.

If you stayed at the Hotel Big Brokerage Firm, things are different. When you told the concierge that you wanted to go to an Italian restaurant and a Steakhouse, he was not as clear with you. He provided you with two suitable recommendations, but they were not the great combination of all of the factors you desired. The recommended steakhouse was: Hotel Big Brokerage Firm Steakhouse Class A. You are not sure if there are better steakhouses nearby, or did the concierge choose the hotel’s restaurant because it is owned by Hotel Big Brokerage Firm? You later may find out that the concierge received some compensation from the restaurants he recommended.

Did the concierge at Hotel Big Brokerage Firm really provide you with advice that was in your best interest?

Or did the concierge at Hotel Big Brokerage Firm provide you with good, but not optimal recommendations, because he was being paid by the restaurants?

The above analogy of a hotel concierge is relevant because of a major Department of Labor (DOL) ruling issued Wednesday, which impacts investment advice to be provided for various retirement plans, such IRAs and 401(k)s.

Since inception, our firm has always held itself to the financial industry’s highest standard, which is called a “fiduciary” standard. This means that we must provide all advice with your best interest in mind. We are not compensated by the investments or the investment providers we recommend. We do not receive any commissions. We are only compensated by you, our clients. We are like the concierge at the Hotel Independent.

Unlike our firm, major brokerage firms and financial institutions which are not
established as a Registered Investment Advisor (RIAs), as we are, do not have to meet this high fiduciary standard when providiThe-Fiduciary-Standardng any investment advice and recommendations. These firms, similar to the concierge at Hotel Big Brokerage Firm, only have to provide “suitable” recommendations. This means they can recommend investments which pay them commissions, may cost you more and may not be the best investment for you. But as long as the recommendation is reasonable, they can do that, even if it is NOT in your best interest.

The new DOL ruling, effective April, 2017, will generally require all financial institutions and advisors who provide advice on IRAs, 401(k)’s and decisions about rollovers from 401(k)’s to IRA rollover accounts to meet or comply with a version of the higher fiduciary standard. These rules are long and complex, which is why I am providing an analogy throughout this essay.

But as they say in the infomercials….wait….there’s more. The new DOL rules only apply to retirement accounts. The new rules do not apply to taxable investment accounts.

So even after April, 2017, big brokerage firms and non-RIAs can continue to provide investment advice for taxable accounts which do not need to meet the higher fiduciary standard of acting in your best interest. What does this mean?

Say you go back to the concierge at Hotel Big Brokerage Firm after the new DOL rule takes effect in April, 2017, and again want recommendations for Italian and Steakhouse restaurants.

• The Steakhouse recommendation (Taxable account) after April, 2017 by Hotel Big Brokerage Firm’s concierge does not need to meet the fiduciary standard, so the concierge can receive a commission from the restaurant they recommend. The restaurant may only be suitable for you, but not necessarily in your best interest. The concierge has conflicting interests and not a legal requirement to act in your best interest.
• However, the Italian restaurant recommendation after April, 2017 (Retirement account) must be in your best interest and meet the fiduciary statement.
• So if you use a brokerage firm or non-RIA after April, 2017 they may have two different standards of advice and methods of compensation, based on whether it is a retirement account or not.

For purposes of this essay, I have simplified the DOL rules to provide you with an overview of this significant upcoming change in the financial industry. The big brokerage firms, insurance companies, other large financial institutions, their trade groups and lobbyists have fought against many of these changes and the DOL rule, as the new DOL rules are not in their best financial interest.

For you, we think this should be simple.

Wouldn’t you want to get a restaurant recommendation that is not conflicting and in your best interest, like from a concierge at Hotel Independent?

If you want financial advice which is always and only in your best interest, wouldn’t you work with a firm that adheres to a fiduciary standard, like ours?

If you are a client of our firm, we always have and always will follow the fiduciary standard to provide you with advice that is in your best interest. We are only compensated by our clients. We do not get paid any commissions based on the investments we recommend.

If you are not a client, do you know whether your financial advisor is similar to the concierge at Hotel Independent or the concierge at Hotel Big Brokerage Firm? Is the advice you are receiving for all of your accounts in your best interest, now and after the new DOL rules go into effect in April, 2017?

This is way more important than just a few dinner reservations. It can have a significant impact on your financial future.

Make sure you are working with the right type of financial advisor. We would be pleased to discuss this with you further….and we will even make sure to get excellent dinner reservations.


For further information on this topic, please see this New York Times article: What New Rules on Retirement Savings Mean for Investors.

Tax Update: Please note that due to a holiday observed in Washington, D.C. on April 15, 2016, income tax returns are due on Monday, April 18, 2016 this year, not on Friday April 15th.

Disclosure: This essay is intended to provide a contrast in general terms between a fiduciary and a firm that is subject to the suitability standard, as well as to provide an overview of the new DOL investment standards, issued 4/6/16. This is not intended to provide a detailed analysis of the new DOL ruling. We do not expect the new ruling to impact how we provide advice to our clients, as we already meet the fiduciary standard. The greatest impact of the DOL rules are to firms that do not currently comply with the fiduciary standard.

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