Investors are about to get some major help in determining which financial advisers are working in their best interest.
After a long battle, which still might not be over, retirement savers will get some common-sense protection that should bring to light conflicts of interest that could cost them dearly.
Here’s some background on the fiduciary rule that goes into effect on Friday.
The Labor Department, under the Obama administration, proposed that investment professionals, when giving advice about retirement plans, such as a 401(k), be required to put their clients’ interests first. I bet you didn’t know that wasn’t already the prevailing standard.
An investment adviser who has a “fiduciary duty” will have to act in the best interests of his or her clients. Advisers who are not “fiduciaries” don’t have to meet this standard. Rather, they just have to make sure that their advice is “suitable” for their clients.
Let me show you how the suitability standard might have played out before the new rule. You were close to retirement and you didn’t know what to do with the money in your 401(k), which had low fees and terrific investment options. Your investment adviser, who was not a fiduciary, suggested that you roll over all of your savings into an account managed by his firm — a transaction that yielded the adviser a huge commission and ultimately cost you in higher fees. Maybe you were told about the adviser’s bonus, maybe not, but it certainly was not made clear to you that your adviser received a fat incentive to get you to roll over your retirement funds.
This type of conflicted advice has cost investors $17 billion annually, according to the White House Council of Economic Advisers.
“The fiduciary rule is long overdue,” said Carolyn McClanahan, founder of the fee-only Life Planning Partners based in Jacksonville, Fla. “Consumers should have the confidence that their adviser is acting in their best interest, not just assuming this is the case.”
Many financial companies opposed the rule, and in early February, President Trump issued a memorandum ordering the Labor Department to reexamine it. The rule was delayed but not reversed. By the way, it does not apply to non-retirement accounts.
In a recent op-ed for the Wall Street Journal, Labor Secretary Alexander Acosta wrote, “Trust in Americans’ ability to decide what is best for them and their families leads us to the conclusion that we should seek public comment on how to revise this rule.”
Some advisers were taking advantage of folks. So now, here’s what investors should expect, according to Barbara Roper, director of investor protection for the Consumer Federation of America.
●Fewer rollover recommendations. “Because advisers will only be permitted to recommend a rollover where that is in the customer’s best interest, they will either have to refrain from recommending a rollover where the workplace plan is the better option, or sweeten the deal in terms of the investments they roll investors into.”
●You may be encouraged to move to a fee-only account. “Though most brokers and insurers have decided to continue to offer commission-based retirement accounts,” Roper said, “some firms have decided the easiest way to reduce conflicts and comply with the rule is to move retirement money to fee accounts.” Under a fee-based account, clients might pay an hourly rate, a flat fee or be charged a fee based on a percentage of assets being managed, Roper added.
●Some firms may drop smaller accounts. “We don’t know how many will actually follow through on this threat, but it is a possibility,” Roper said. “If this happens, investors need to know that there are firms that are available who will serve even the smallest accounts under a fiduciary standard. It’s a nuisance to have to move, but do you really want your money with a firm that will only ‘advise’ you if they can continue to profit unfairly at your expense?”
There is much to learn about the rule, and Roper has put together an explainer for investors who had been working with non-fiduciary advisers. You can find it at ow.ly/kNpq30cnb0p .
Certainly there may be changes to how you receive and pay for retirement investment advice. But keep in mind that they are, by and large, to reduce conflicts of interest.
If you have more questions, join me for a live discussion at noon Eastern on June 15 at washingtonpost.com/discussions. Roper will be my guest.
There’s a new rule in town, and it’s in your best interest to now ask your adviser if he or she is a fiduciary.