The Department of Labor (DOL) Fiduciary rule officially takes effect today. Long delayed, the rule expands the definition of a fiduciary.
Previously, brokers offering advice on retirement accounts simply had to meet suitability standards which meant that their recommendations including the products they sold their clients had to be in line with the client’s goals. For example, a retiree seeking advice on their 401k is instructed by their broker to do a rollover on the balance into a variable annuity.
This client is a conservative investor and would like to see some growth of his or her money. Granted this strategy could provide the client with continued growth of their principle and depending on the subaccounts used within it could minimize market risk. However, the fact that annuities often come with fees upwards of 3.5% that erode the growth of the account value and pay the broker large commissions has nothing to do with the client’s best interest or meeting their goals.
A standard that was only required of fee-only advisors or RIAs, the fiduciary definition, will now encompass brokers and force them to disclose all fees as well as perks they receive for the products they sell in retirement accounts. The goal of this transparency is to make investors aware of potential conflicts of interest that may explain why certain products would be marketed to them.
The ‘impartial conduct standards’ of the rule require advisors to give advice in the ‘best interest’ of their clients, charge reasonable compensation, and make no misleading claims. The bottom-line is that this rule seeks to enforce what every financial advisor should already be doing, but unfortunately, we see cases on a weekly basis where clients have been sold unsuitable products.
Usually, the client didn’t understand the cost of those products and were made false promises of how the products would perform. How soon and how effectively the rule will be enforced is unclear. Large firms are already making changes to their compensation structures to avoid litigation. Investors will still need to be as prudent as ever. Non-retirement accounts will not fall under this rule so knowing how your broker or advisor is compensated is important.
The best rule of thumb would be to seek out a fee-only advisor, meaning they are compensated as a percentage of assets under management, not commissions. Ask the question, ‘What is your fee?’ If the answer is, ‘It depends’ it may be time for a second opinion.
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