You don’t have to take the advice of your financial adviser.
I need to say this because, already, some investment professionals are scaring clients into thinking that the federal government is forcing them to invest a certain kind of way — all to comply with the Labor Department’s new fiduciary rule.
Under guidelines that went into effect June 9, investment professionals, when giving advice about retirement plans such as a 401(k), are required to put their clients’ interests first. Every time I write that description, I shake my head because that’s what should have been happening all along. Except it wasn’t.
An investment adviser has a “fiduciary duty” to act in the best interests of his or her clients. Financial-planning professionals who are not “fiduciaries” — say, certain brokers or insurance agents — aren’t held to that same standard. They just need to make sure that their advice is “suitable” for their clients. What this means, in practice, is that they can have all kinds of conflicts of interest. For example, the person advising you to buy a certain mutual fund might not reveal that he is getting a huge commission to sell you the fund or that there is a similar lower-priced product available.
The law of the land now is: If you give retirement investment advice, you are a fiduciary and, as such, you have an obligation to give advice that is in the best interest of your client. This includes considering a client’s goals and risk tolerance.
Consumer advocates championed the rule’s implementation. For obvious reasons, many investment companies and professionals did not. Some issued warnings that, to meet the standards, they might have to overhaul a client’s portfolio, perhaps increasing costs.
As the fiduciary rule is phased in, be cautious about the advice you’ll receive. Some confused or unscrupulous advisers may still try to steer you wrong.
A Massachusetts couple contacted me with concerns. The husband wrote:
“My wife and I have retirement savings in different plans that offer different investments. We have a financial adviser who considers all of our holdings jointly, and makes recommendations based on the combined portfolio, taking advantage of the best choices among the different plans. We just met with the adviser, and we were told that this arrangement is no longer feasible. Although our combined portfolio may stand up to the fiduciary rule, independently they may not. As a simple example, imagine that all my holdings are in equities, and all my wife’s holdings are in bonds. In isolation, it would be hard to claim that the allocations and selections are in either of our [separate] best interests. He proposed a new portfolio for each of us that reflects a more justifiable allocation for each independently, but is worse (in my opinion) in terms of expected performance. Is this a feature of the new fiduciary rule, protecting us from ourselves?”
It’s not unreasonable that the adviser is reevaluating this couple’s retirement portfolio. But indicating that his advice is something the couple must take for him to comply with the law seemed wrong based on my reporting on the rule.
I wanted a second opinion, so I asked Barbara Roper, director of investor protection for the Consumer Federation of America.
“The rule does not in any way limit what people can choose to do with their money,” she said.
The adviser’s guidance might reflect an overly cautious interpretation of the rule.
“Advisers are required to consider the customer’s overall financial picture in determining what is in his or her best interest. That would include looking at how the rest of the couple’s portfolio is invested,” Roper said.
Firms not sure of what they should do need to check with the Labor Department before making these sorts of recommendations, she said. And, as long as advisers are documenting their recommendations and a client’s desire to do something contrary to their advice, they should easily withstand the best-interests test.
Roper said it’s likely that there will be more such examples.
“Customers should also think about how this sort of nonsensical recommendation, which isn’t consistent with the rule, let alone required by it, reflects on the overall quality of the advice they are getting.”
If you’re concerned about how the new fiduciary rule may affect you, join me for a live online discussion at noon Eastern on June 15 at bit.ly/color615. Roper will be present to answer your questions.