The fiduciary rule explained – How will it affect retirement?
Slated to go into effect June 9, the new rule seeks to put consumer protections in place for retirement assets
You may have seen the news lately that the Department of Labor is working to put in place a new fiduciary rule – set to go into effect June 9, 2017. In 2010, the DOL – the primary regulator for retirement plans such as your company's 401(k) or 403(b) plan – proposed a change to the definition of fiduciary: The Employee Retirement Income Security Act of 1974, significantly expanded the scope of those who become fiduciaries. The new rule seeks to put consumer protections in place for retirement assets. Because funds are often rolled out of these plans into Individual Retirement Accounts, the DOL is looking to pass on some of the protections to individual retirement accounts. The main emphasis is on putting the client's interest first and ensuring that advisors charge only reasonable compensation. There are also rules about disclosure of conflicts of interest.
The new fiduciary rule will also require a formal documented analysis if an advisor is recommending a client rollover their 401(k) balance to an IRA. This should include a comparison of the investments available in the 401(k) to what they propose in the IRA and why they think the IRA is better. It should also include a cost comparison. The IRA will likely, but not always, cost more. But in return the investor may receive a superior investment allocation or overall management and monitoring of funds that was not offered inside the 401(k) or even comprehensive financial planning.
The new fiduciary rule sounds like a good idea, right?
So why are some financial planners against it?
Many financial industry groups, such as the CFP Board of Standards, the Financial Planning Association and the National Association of Personal Financial Planners support the fiduciary rule. Yet others in the industry have strongly opposed it. The main divide is between those advisors who already act as a fiduciary – meaning they put client's interests first – and those who do not.
Yes, believe it or not, your advisor may not have to act with your best interests in mind
Here are some different types of financial advisors:
This person charges a fee for his or her service. Certified Financial Planners must follow a very strict ethics code, which planes the client's interest first and requires full disclosure of all conflicts.
REGISTERED INVESTMENT ADVISOR
This individual may offer both financial planning and asset management for a fee, but does not take the commissions or receive any undisclosed compensation. Feed may be in the form of a flat retainer or a percentage of assets (e.g., 1 percent to 1.5 percent of assets under management.) Registered investment advisors are required to act as fiduciaries and act in the client's best interest.
BROKER | REGISTERED REPRESENTATIVE
This field mainly does transaction-oriented business and receives a commission (e.g. 5 percent of assets invested or a ticket charge per asset purchased or sold), and may also receive fees from the investment managers in which they invest, called 12b1 fees. They are not required to act as fiduciaries and their firms generally prohibit them from doing so for liability concerns.
Insurance agents generally specialize in the sale of insurance or annuities for which they receive a commission (e.g. – 3 percent to 7 percent of assets invested). They are also not required to act as fiduciaries.
Many advisors are a combination of the above. There are good advisors in all categories (and of course a few bad apples as well). It is important to take note that everyone is getting paid. Financial advisors are professionals and have mortgages to pay and retirement to save for just like everyone else.
The key is that you understand what compensation your advisor is receiving from all sources and if there are any potential conflicts.
For example, placing your investments with one firm versus another may impact their compensation and thus be the driving factor in their choice. It is also important to compare the value you are receiving to the compensation the advisor is paid.
The main argument against the fiduciary rule is that smaller account holders will not be served because advisors who can no longer charge a commission will not make enough compensation to want to manage the smaller accounts.
I disagree with this argument. I think financial advisors can charge a planning fee and own the value they are providing to clients. If they are providing more comprehensive services for a fee, then there is no longer a need to earn commission on assets.
Overall, I think the fiduciary rule is good for consumers. It's designed to help protect the hard-earned dollars you and your employers have invested in retirement accounts so the funds are there when you need them.