How Investors May Benefit from the Fiduciary Rule

By: KBS Direct

The Fiduciary Rule has yet to take effect, having been pushed out to mid-2019; however, to invoke its name is to create a stir in the world of financial advisors. The rule has taken on a life of its own, and now it may not even matter if it ever becomes a law—it’s bringing change anyway.

The rule puts more responsibility on financial advisors to act in the best interest of their clients. This means disclosing whether investment opportunities include upfront commission or fees. In some cases, advisors have long relied on current fee-based models that did not require upfront disclosure.

Challenges Driving The Rule

In a interview, Chuck Schreiber, CEO and co-founder of KBS Realty Advisors and KBS Capital Advisors, said the impetus for change within the industry first came from the Financial Industry Regulatory Authority (FINRA), a non-governmental agency that regulates the securities industry. FINRA began analyzing fees about 10 years ago, questioning what would be an appropriate commission for an investor to pay. Subsequently, the Department of Labor took up the charge, and issued the Fiduciary Rule in April of 2016.

Only a Matter of Time

Said Schreiber: “Whether this law and the rules are enacted as written today or even modified—and it may be modified—it already changed the discussion about commissioned products.”

Just as someone who hires an attorney will ask about fees, the same type of discussion will likely take place between advisors and their clients—if it isn’t happening already. Said Schreiber: “There are financial advisors who as far back as two years ago modified the structure of their organization, group, firm, or reps affiliated with that firm in their interaction in managing their relationship with their clients.”

Some firms are making changes to be in compliance with the rule, ahead of its enactment. Schreiber, and Peter Bren, Chairman, President and co-founder of KBS Realty Advisors and KBS Capital Advisors, are in that category.

They launched the Growth & Income Real Estate Investment Trust agreeing that as the sponsor, they would pay all upfront fees and expenses associated with an investment. Said Schreiber: “There is no commission or acquisition fee [paid with proceeds raised in the offering], with the intent to have 100% of the dollars an investor is committing into the fund go into the product. I don’t know of any other fund that has this.”

The Momentum for Transparency

The movement towards greater transparency has a lot to do with investors becoming savvier. “I think investors are much more knowledgeable about the opportunities” said Schreiber. “The more people know, the better off we all are.” Investors aren’t just looking at upfront costs, they’re also paying attention to sponsors’ track record of investments and the strategies they use.

With Securities and Exchange Commission Jay Clayton declaring in October that the commission was drafting its own fiduciary rule proposal, the momentum for transparency is expected to  continue to increase.

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