Suppose you and your financial advisor decide that your portfolio needs a mid-cap growth mutual fund, but one of the funds offers an all-expense trip to Hawaii for advisors IF they put your money into that particular fund.  Under the Suitability Rule, the stockbroker is permitted to recommend the mutual fund offering the free vacation, but there is no requirement to tell the client that the broker is earning something extra, like a vacation.  If it is a mid-cap growth mutual fund, it must be “suitable.”  Under the Fiduciary Rule, however, the stockbroker is required to act in the client’s best interest, which would require the broker to recommend the best-rated fund with the lowest relative expenses, plus other factors like management turnover, track record, etc.  While it is still a largely subjective process to select a fund under the Fiduciary Rule, the free vacation should not be part of the process, and it must be fully disclosed to the client.

Also, suppose you want your stockbroker to buy some bonds for your portfolio, and he calls you up to say he just bought you a bond with a face value of $10,000 and only charged you $9,900.  Under the Fiduciary Rule, he has to inform you that he only paid $9,700 for the bond and made an extra $200 off you.  (This is called a “mark-up.”)  Under the Suitability Rule, he doesn’t have to tell you about the hidden $200 profit.

This new ruling by DOL affects stockbrokers, not registered investment advisors (RIAs), because we are already subject to the Fiduciary Rule,   Some investors just remember that there are zero hidden fees with RIAs!  

That is not true for stockbrokers.  When this new DOL requirement becomes effective next year, even stockbrokers will have to disclose ALL fees — but only for IRAs and other tax-deferred accounts.  They will still be able to impose hidden fees on regular taxable accounts.,

Naturally, stockbrokers have been fighting this ruling.  They argue the brokerage firms will no longer allow their brokers to make recommendations anymore.  The broker might just  say “here are ten mid-cap growth mutual funds to pick from” without making any recommendation.  The brokerage firms predict that small IRAs will be orphaned or forced online without any professional guidance from either stockbrokers or RIAs.  You know . . . the sky is falling argument.

Is the new DOL ruling a good thing?  Absolutely!

But, it needs to be extended to include all investor accounts.