How the New Fiduciary Rule Might Affect Your Retirement Investments

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You would expect that your financial adviser would recommend investments for you that are designed to serve your best interests and increase your wealth. You would certainly hope that your adviser wouldn’t put their own financial interests ahead of your own! You might even assume that the requirement that financial advisers act in their clients’ best interests with regard to retirement investments is enshrined in law, but it’s not—or it least it hasn’t been, until now.

Unfortunately, some financial products feature high fees and generate significant commissions for the advisers. This gives them a personal financial incentive to recommend certain investments for their clients, even if those investments might not, objectively speaking, generate the best return for those clients.

In April, 2016, the U.S. Department of Labor (DOL) decided to take action and draw up a rule that would compel financial advisers to put their clients’ interests first: the fiduciary rule.

What is the DOL’s Fiduciary Rule?

The fiduciary rule requires financial advisers to behave as fiduciaries with respect to their clients. In other words, their obligation would be to act in their clients’ best interests, regardless of their own. How does that differ from previous law? Prior to June 9, the active date of this part of the fiduciary rule, financial advisers’ obligation was only to make recommendations of “suitable investments.” So long as the investments were appropriate to their clients’ financial goals, it was acceptable to urge clients to make investments that ultimately would benefit the adviser more than the client.

The enactment of the fiduciary rule changes this potential outcome. Now, financial advisers are prohibited from accepting payments or other compensation that would lead to a conflict of interest, unless there exists a contract between adviser and client creating an enforceable duty to place the client’s interest ahead of the adviser’s. If there are any conflicts, financial advisers will be required to disclose them. Advisers are also required to charge clients only reasonable compensation for their services.

The fiduciary rule was intended to take effect in April 2017, but President Trump signed an executive order early in the year delaying its implementation until June 9. After additional review, the remainder of the rule, including the requirement of a stated obligation in contracts to put a client’s interests first, is expected to take effect on January 1, 2018. There does remain a possibility that the DOL will make changes to the rule prior to that time.

Be aware, too, that the fiduciary rule applies only to specific situations. It covers retirement accounts, like 401(K)s and IRAs, which carry a tax advantage. It does not apply to many other investments, such as brokerage accounts.

How the Fiduciary Rule Should Affect Your Relationship with Your Financial Adviser

First and foremost, although most financial advisors recognize they have an ethical obligation to put your interests before their own, up until now there has been no legally binding obligation to do so. You should, therefore, be willing to ask your financial adviser some hard questions and to review their background more closely than you might have done thus far.

Delve into your financial adviser’s credentials. Make sure they’re well-substantiated. Research their experience. If you find negative reviews of your adviser, evaluate their substance.

Delve into your financial adviser’s credentials. Make sure they’re well-substantiated. Research their experience. If you find negative reviews of your adviser, evaluate their substance. Do multiple reviews suggest that your financial adviser recommended products based on the commission they might have received?

Of course, you must also talk to your financial adviser directly. The most important question to ask: “Are you serving as my fiduciary?” If the answer is no, you need to ask how your adviser decides to recommend investments for you. Another question to ask how your financial adviser is compensated. If they don’t receive commissions, they have much less incentive to push investments that are not best for you.

If you decide that you need a new or different financial adviser, your estate planning attorney is an excellent resource for recommendations.

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