For as long as I can remember, insurance agents and stock brokers who work for a brokerage firm have operated under what has been termed a “suitability standard’ when providing investment products to their clients. This standard calls for making product recommendations that are consistent with the best interests of the client and was promulgated by the Financial Industry Regulatory Authority (FINRA).
Investment Advisers, those who work directly for clients, have long adhered to a stricter fiduciary standard as called for in the Investment Advisers Act of 1940. This standard requires these advisers to place the client’s interests above their own.
In June 2017, the Department of Labor dramatically altered the investment landscape by instituting a new fiduciary standard that required all professionals (regardless of one’s employer) offering advice or investment services to retirement accounts to place the interests of their clients ahead of their own in servicing these accounts.
A fiduciary standard requires the disclosure of potential conflicts of interest, as well as requiring advisors to trade securities with the “best combination of low cost and efficient execution.” The new DOL standard placed restrictions on the payment of commissions, essentially eliminating high front-end payments for product sales to retirement accounts.
Certified Financial Planners have provided services to their clients under the fiduciary standard for many years.
Consumer advocates were strongly in favor of this new DOL standard, since it was felt that the days of high commission sales to unwary investors would be over. Others on the industry side feared that the cost of compliance would mean that no brokerage firm would be able to offer products and services to small accounts due to the inherent liability issues emanating from a wide-ranging fiduciary standard.
Soon after taking office in 2018, one of the first actions of President Donald Trump was to issue a presidential memorandum calling for the review the DOL’s proposed fiduciary standard. Over the ensuing months, the DOL delayed the implementation of key provisions of the rule.
Earlier this year, however, the Labor Department announced that a form of the fiduciary standard would soon be re-introduced. The DOL is working in concert with the Securities and Exchange Commission, which is finalizing its own advice reform package.
The crown jewel of the SEC’s approach will require broker-dealers to recommend only those financial products to customers that are in the best interests of the customer. Additionally, the broker-dealer must clearly identify any potential conflicts of interest and financial incentives that the broker-dealer may have with such products. This new standard has been termed “regulation best interest,” and while it is not a fiduciary standard, it does improve the current financial environment by offering more protection to investors and clients.
Perhaps more importantly, the cost of compliance to the industry as well as the potential liability costs of the Regulation Best Interest would be less onerous than the original DOL fiduciary standard
Sadly, the DOL did not disclose an implementation date for the new rules.
Even though the actual implementation of the original DOL fiduciary standard was put on hold in 2018, many firms had already taken steps to comply with the new rules. This new SEC rule will have a greater impact on those smaller broker-dealers who made no changes to begin the process of compliance with the original DOL fiduciary rule.
One stock that is potentially very attractive for the dividend-conscious investor is Kellogg Company. Morningstar classifies this stock as “wide moat,” which means that the company has one or more competitive advantages that make it difficult for competitors to erode its market share. The stock is currently trading around $56 per share and is probably undervalued. Very importantly, its forward dividend yield is 4.1%, which represents a payout ratio of around 50%. Very tasty.