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Financial Industry Trends and Updates

With half of 2016 behind us, we can see a number of developments in the financial industry that will likely have an impact on investors for the rest of the year and beyond. Here are updates in two important areas: Socially Responsible Investing and the Fiduciary Standard for Investment Advisors.

Socially Responsible Investing

Socially responsible investing (SRI), is investing that attempts to evaluate an investment’s social, environmental, and governance policies in addition to its potential to provide returns. Investment dollars placed in SRI or similar strategies have grown 13.1 percent per year between 1995 and 2014 ( ). Although interest in SRI is widespread, it is most often mentioned by millennials (people born between the early 1980s and early 2000s) and women. (  Four developments are making SRI more attractive to millennials, women, and all investors interested in SRI.

One of the primary developments contributing to the increase in socially responsible investing is the growing realization that including SRI factors in investment criteria does not always mean sacrificing returns, as it did in the past. A 2015 Duetsche Bank analysis of a large number of studies of investment strategies found that a large majority of studies indicated a positive return when SRI investments were added, and roughly 90 percent of studies showed at least a neutral relationship between adding SRI investments and returns. (

A second development accounting for growing investment in SRI is that SRI index funds have become more broadly available. For many investors already interested in the low cost, passive strategy of index funds, the availability of low cost index SRI funds is very attractive.  Third, companies are becoming more interested in making business and financial decisions based on the impact they will have on the environment and social outcomes, as companies with strong sustainability scores have been found to show better operational performance with lower risk (

Absence of tools to evaluate and monitor SRI investments has hampered SRI investing in the past.  Recently, Morningstar, one of the most popular resources for evaluating mutual funds and exchange traded funds, started evaluating all funds on their SRI impacts by assigning a “sustainability rating” to each investment. This allows fund investors to evaluate their investments not only on the basis of return and mathematical measures of risk, but also on the environmental, social, and corporate governance.

Fiduciary Standard for Investment Advisors

Many people assume that all financial advisors are required to act in their client’s best interest, known as the fiduciary standard. Unfortunately, the current law permits financial advisors to choose a lower standard:  “suitability.” About two thirds of financial professionals choose this lower standard.

Imagine a waiter promoting  a high priced but mediocre steak dinner and receiving a bonus or commission when you buy it – it may be suitable for your dinner, but it would be in your best interest to be informed about  prime steak,  fresh fish, vegetables and the price and commission, too. Under the current rule, the mediocre steak would be an approved suitable transaction even if the price had not been properly disclosed or compared with better and still affordable alternatives. Under the best interests or fiduciary rule, the waiter would have a responsibility to tell the whole truth about the quality of the meal and the price, as well as the alternative prime steak and fish and vegetables.

The Department of Labor (DOL) is responsible for regulating company retirement plans as well as all types of  Individual Retirement Accounts ( IRA, Roth IRA, SEP IRA). Recently, the DOL changed its rules, requiring that all financial professionals act with the account owner’s best interest in mind. For the most part, it requires compensation by fee rather than by commissions that might motivate the financial professional to make recommendations based on the commission rather than on what is best for the public.  The change to the fiduciary standard goes into effect April 10, 2017 and applies only to retirement accounts.

Although the DOL’s rule is an important improvement for consumers, it isn’t perfect. First, there is an important exception to the rule, known as the “Best Interests Contract.” This exception allows financial professionals to be paid on commission if they provide a written statement to the consumer confirming that what is being recommended is in their best interest. Second, the new rule applies only to retirement accounts. Government agencies that regulate the  investment accounts that are not retirement accounts have announced that they are considering eliminating the lower suitability standard, but they have not done so yet. Third, the new law is not in effect until April 10, 2017.

How might you find out if your current financial advisor is a fiduciary? The first way, of course, is to ask whether s/he is a fiduciary and whether that applies to your retirement and non-retirement accounts as well. As always, review these and other important financial issues with your trusted advisors.

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