Will the Department of Labor's New Fiduciary Rule Impact You?
In a recent article, we learned about the difference between the Fiduciary Standard and the Suitability Standard (read: Fiduciary vs. Suitability: Why You Need To Know The Difference). While at first blush the two may sound quite similar, the two standards are actually quite different.
The Fiduciary Standard maintains that a financial advisor must put his or her client’s best interest ahead of his/her own. Under the Suitability Standard, a financial advisor is only required to reasonably believe that any recommendations made are suitable for the client. This means that advisors are able to suggest certain investments if they are suitable, even if that means the advisor will earn higher fees or commissions than they would if they suggested a similar investment with lower costs.
Advisors can "push" products that may be suitable but not the very best for their client.
The Suitability Standard has been scrutinized for some time due to conflicts of interest issues. To illustrate just how financially impactful these conflicts of interests can be, see the following statistic:
A White House Council of Economic Advisers analysis found that these conflicts of interest result in annual losses of about 1 percentage point for affected investors—or about $17 billion per year in total. To demonstrate how small differences can add up: A 1 percentage point lower return could reduce your savings by more than a quarter over 35 years. In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period after adjusting for inflation, it would be just over $27,500.
Enter the New Fiduciary Rule
Numerous discussions over whether or not to make changes to the suitability standards have taken place over the years. Now, the Department of Labor is taking action and as of last week passed a new law, the Fiduciary Rule, that will protect those investors who have retirement accounts. This new rule covers all financial professionals offering investment advice for retirement accounts- including 401(k)s and IRAs. The new law states:
Any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary. Such decisions can include but are not limited to, what assets to purchase or sell and whether to rollover from an employer-based plan to an IRA. The fiduciary can be a broker, registered investment adviser, insurance agent, or other type of adviser.
The new rule, which is expected to take effect in stages beginning in April 2017, is expected to protect the consumer and keep billions of dollars in the pockets of investors. We’ve all seen the scary statistics on retirement in this country. With this new rule, we may be able to give more people a fighting chance.
If you are interested in finding an investment advisor who is required to uphold the Fiduciary Standard, a great place to begin is by looking for a fee-only financial planner. Fee-only planners and advisors do not sell investment products, nor do they make commissions. Fee-only planners charge a fixed price and aren’t driven by selling any kind of products. Their advice is held to the highest standard and they are required to put their clients’ interests above their own. To find a fee-only financial planner near you, check out the Nation Association of Personal Financial Advisors at www.NAPFA.org.
This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.