Broker Check


In April 2015 after many years of debate, the Department of Labor (DOL) passed regulations that enacted fiduciary guidelines for the management of retirement accounts. In effect, the rule subjects investment advisors to a fiduciary standard rather than adhering to existing and less stringent suitability requirements. This difference is quite profound. An investment advisor operating as a fiduciary must always do what is in the best interests of the client while the suitability standard simply requires that the broker must have a reasonable basis for a sale or buy of a security. The recommendation must be suitable based on a variety of factors including income and net worth, investment objectives, risk tolerance and other security holdings.

Recently, the Senate voted to repeal this rule by a 56-41 count. President Obama has vowed to veto any legislation that rejects this regulation. Regardless of the outcome, there is a sea change underway as investors demand greater accountability and transparency from their advisor.

Most of my clients are already aware that I passed the requisite exam to become an Accredited Investment Fiduciary (AIF) 6 years ago and have operated in a fiduciary capacity on fee based discretionary retirement accounts ever since. In actuality, I have acted as a fiduciary (though not officially) on all fee based accounts since I transitioned to primarily fee based investment management almost 20 years ago.

Unfortunately, not all retirement portfolios, particularly small accounts, stand to benefit from the fiduciary standard. Due to the reduced revenue resulting from rising compliance costs that advisors are likely to incur to manage these smaller accounts, it is speculated that brokers might choose to terminate the client relationship rather than adapt to this new standard. In fact, brokers may not have a choice as many investment firms may raise the minimum account size in order to reduce costs and, in effect, "fire" smaller clients who do not qualify. The DOL ruling does provide an alternative approach by permitting the application of the Best Interest Contract Exemption (BICE) that pledges advisors will act in the clients best interests and only earn "reasonable" compensation. Under this exception, all pertinent information such as fees and conflicts of interest must be disclosed to investors.

In the era of increased scrutiny, investment advisory services are undergoing seismic changes. Meanwhile, the traditional brokerage firms (Morgan Stanley, UBS, Merrill Lynch, etc.) whose compensation has been based primarily on commissions generated from transactions are predictably bucking this trend and leading the charge to rescind this new regulation. While we cannot know for sure what resolution will ultimately emerge, it is likely that these commission oriented firms will need to re-evaluate their compensation structure and purge "unprofitable" accounts. Their long standing business model is under intense pressure that will likely force them to adopt a system where the interests of both the investor and the advisor are fully aligned.

Clearly the vast majority of all brokers/investment advisors manage their client's accounts in an open honest manner. But full disclosure, lower fees and the removal of any potential conflicts of interest has precipitated the transition to a fiduciary standard. Since I have operated under this standard for all fee based accounts for many years, I applaud this development as it will advance the transparency that investors demand. Any process that removes doubt and confusion as well as reducing costs represents a welcome benefit to all.


Clifford L. Caplan, CFP®, AIF®

Announcement: I am very pleased to announce that my son, Stephen, will be joining our practice in August. For the past 4 years, Stephen has worked for MainStay Investments as a consultant to investment advisors. He will now transition to the client side of investment management. Stephen passed his Series 7 and insurance licenses several years ago. He earned a BS in Finance from the University of Rhode Island.