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Last week, The Department of Labor (DOL) released its final ‘Fiduciary Advice’ rule expanding the fiduciary standard governing advisors and brokers that provide investment guidance to retirement accounts.

This rule changes the definition and scope of fiduciary advice in ERISA retirement plans and requires any person who provides advice to act in the customer’s “best interest” and comply with conflicts of interest rules.

At the heart of the new DOL regulation is the key distinction of investment advice that is ‘suitable’ for versus in the ‘best interest’ of the client.

 

So what is the difference?

Something that is ‘suitable’ may not be in the ‘best interest’ of the client.

Consider the analogy of a car salesman – If you go into a Lexus dealership, they will most likely recommend a Lexus, even if your expressed needs show that a Toyota is a better fit for you. They’d argue the heftier price tag is justified by the luxury and higher performance; although not wrong, it does raise the question of whether the recommendation is truly in your best interest.

The same is true for advisors who do not act as fiduciaries. They can recommend a ‘suitable’ investment for you (that they receive high commissions on) even though a better, lower-cost alternative is available.

The responsibilities of a fiduciary expands beyond just selecting the lowest cost investment; but at its core, the fiduciary standard requires advisors to always act in the best interest of their clients – putting their client’s interests above their own and avoid conflicts of interest at all costs.

Given these more stringent stipulations for fiduciaries, there is little question that the Fiduciary Standard better protects investors than the suitability standard. Which is why the Sequoia 401(k) Team is encouraged by the new ruling and analysis to date, having been long standing advocates and practitioners of the Fiduciary Standard protocol.

For now, no action required. The Sequoia 401(k) team is committed to keeping you well informed and will continue to update you accordingly.

As always, please do not hesitate to reach out to us with any questions.

 

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

 

Luciano Costantini – Principal & Director of Retirement Services, Sequoia Consulting Group