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Best Interests and Advisor Compensation

The DOL fiduciary rule may – or may not – come into play in some form this month, depending on several factors which are not yet fully known. But while we are waiting to see what happens, let’s consider what the benefits and detriments of the rule might be for the folks who are ostensibly to be helped by the implementation of the rule.

First, the easy one – the best interests of the investor must be the priority of the advisor or broker who recommends a particular investment for a retirement plan account. Sounds great, doesn’t it? However, like many other things in life, the easy one is not really all that easy and what is in the best interests of one investor may very well not be in the best interests of another.

One focus of the rule is on compensation of the advisor and common wisdom on this item is that level compensation – meaning the same rate is paid to the advisor for any product of a particular type recommended to an investor – is consistent with the best interests of the investor client. How can that be? Products, like investors and advisors, are all different. Does this “rule” mean that an advisor compensated at, say, 1% of the value of the investment in each of two different investments is acting in the investor’s best interests in making the recommendations of those investments because of that equal rate of compensation? Hardly. One product could be a poor performer, carry negative tax consequences or be subject to substantial risks while another product, at the same advisor cost to the investor, could carry less risk, meet investor tax objectives or outperform most products in its category. Clearly, these products – for which the advisor compensation is the same – are not the same with regard to how they might work with the investor’s portfolio and goals.

Saying that equal compensation to the advisor equates with meeting an investor’s best interests is naïve and misses the point almost entirely. All it says is that an advisor would not be making a particular product recommendation based on the advisor’s own compensation, which seems a good thing, but it does not mean that a recommendation has anything else to do with the investor’s interests.  Bottom line, an advisor’s compensation very clearly should be a factor in evaluating how the advisor is serving an investor but it should not be the only factor or the controlling factor – investing is just not that easy.


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