Many Americans assume that their financial advisor is legally obligated to act in the best interest of the consumer and disclose any conflicts of interest. However, that is only true for those who are held to a fiduciary standard, such as Certified Financial Planners (CFPs) or Registered Investment Advisors (RIAs). Brokers and other agents may be held to a “suitability” standard if they so choose, where they are obligated to give advice suitable to the consumer’s situation, but are still able to steer consumers into funds and investments that are also more profitable for the advisor.
The Department of Labor (DOL) recently adjusted the rules to require that all advisors and brokers handling retirement accounts be held to the fiduciary standard. The full rule does not go into effect until January 2018 and only affects tax-advantaged retirement investment accounts, but it is a step in the right direction.
Previous research has estimated that conflicts of interest costs investors as much as $17 billion annually in unnecessary fees or poorer returns. The DOL action is estimated to save retirees around $40 billion over its first ten years of existence. With an obligation to take your best interests in mind, advisors will be looking toward lower-cost investments.
Forbes identifies some winners in this scenario: No-load funds and annuities that do not have sales charges, exchange traded-funds, and the passive investing approach. Active investment requires more trading to beat benchmark expectations, and few fund managers do it well enough to even meet the benchmark, much less surpass it. Passive investments in low-cost ETFs and no-load funds are more likely to fulfill the needs of retirees — to warrant larger fees/commissions and other higher expenses, there must be a clear reason why such an investment is superior.
The new rules are likely to drive more advisors into fee-based accounts, where you are charged a flat fee for account management instead of transaction-based fees. There will still be discrepancies in fee structures, so be sure to shop around for the best deal that meets your needs.
Your workplace 401(k) is not generally affected by these rules, but it will be if you roll it over into an IRA. At the moment, a rollover recommendation from a broker can be considered as “one-time” advice that does not require acting in the investor’s best interest. The new rule applies the fiduciary standard in this case as well. Given the typical size of a rollover, fiduciary advice is extremely important in order to maximize your retirement fund balance.
What are the possible downsides of such a rule? Brokers argue that smaller accounts may be underserved as they become less profitable for advisors. However, with all the available outlets it seems likely that there will be plenty of advisors willing and available to take smaller accounts. A Reuters article captures it nicely: “If they do not want you, it is likely that you do not want them.”
The DOL rule is complex and does contain some loopholes. Congress still has over a year and a half to modify the rule before it goes into effect — so it is wise to verify the status of your financial advisor, just as it always has been. Ask for certifications and how they are compensated, and if something doesn’t feel right, trust your instincts.
Keep up with the latest developments to make sure you fully understand the protections that guard your valuable retirement funds, and in the meantime, review your retirement accounts today to make sure that you are getting the most out of your investment dollar before the new rules take effect.
Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.
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