You may have heard some buzz in the news about the new regulation that is meant to protect your interests as an investor. If technical jargon in those articles has you confused, here is what you need to know in plain English.
The Department of Labor (DOL) fiduciary rule was issued in April 2016 to address potential conflicts of interest in investment advice related to retirement accounts. The rule is set to become effective in April 2017, although there is some uncertainty as to what will happen to this legislation under the new administration. Most experts believe the rule will continue as planned, which is a good thing for you as an investor. If implemented correctly, it has the potential to deliver better investment advice for you at a lower fee.
More About the DOL Fiduciary Rule in Simple Terms
The key points of the new law require all financial advisors to recommend what is in their clients’ best interests when it comes to guidance on 401(k) plans, individual retirement accounts, or other qualified accounts where money is saved for retirement.
This means that the advisor must consider your best interests above all else in suggesting investing strategies and products. After all, you deserve advice that is not colored by whether your advisor is getting a larger commission from selling you a particular mutual fund this month.
One might imagine that this is the way things ought to have been all along, but depending on your advisor that may not have been the case. The DOL rule creates a considerable change for some types of advisors. For example, independent broker dealers were previously only required to recommend “suitable” investments, which is a lower standard to achieve than the current “best interest” standard. On the other hand, registered investment advisors have been held to the higher standard all along.
How Does This Affect You?
As the new rule takes effect, here are some questions you might ask your advisor or financial planner to understand how it will affect you.
- What, if anything, should I expect as a change in your processes as a result of this regulation?
- Are there any conflicts of interest that I should be aware of?
- What process do you use to make sure the investment choices align with my situation and goals?
- How often will you re-assess my goals and financial situation to ensure we stay on track?
- How will you be compensated?
In practical terms, your advisor or financial planner may stop offering certain products (for example, ones that paid him or her commissions) in favor of charging a fee for managing your account. The DOL rule does not necessarily ban commissions or revenue sharing, but it does require more transparency and paperwork. Commissions or not, the advisor must act in the client’s best interest.
Advisor Conversations: Red Flags
As you speak with your advisor about the upcoming change, and in every conversation, pay attention to how well he or she tailors recommendations to your unique situations. If your advisor suggests strategies or products before doing a complete assessment of your financial situations, beware. After all, how can someone act in your best interest if they don’t know what it is?
Tread lightly if your advisor does not have the time or the ability to explain your options in plain English. If you are getting lost in jargon, or hearing “Just sign this – I will explain it later,” remember that everyone is capable of understanding their investments and financial situation. Sure, investments can be technical and complex – but their explanations don’t need to be!
Sales pressure, promises to manage investments for free, and lack of attention to detail round out the list of red flags. The new rule is meant to protect your interests, but you still have to look out for yourself and use common sense and good judgment.
Smaller Accounts May Get Pushed to Robos
Advisors are bracing themselves for more paperwork and a change in how they charge for their services. Some may decide that accounts under a certain minimum are just too small for them to provide conflict-free advice in a way that is profitable.
As a result, investors with smaller retirement accounts might find that their advisor suggests a different service model. Options may include using an automated investment platform like Betterment, or transitioning to a similar digital advice tool offered by the advisor’s firm. If this happens to you, don’t despair – you may actually be better off with a less expensive and better scaled service than with an advisor who must compromise unbiased advice in exchange for commissions.
No matter what your retirement account balance is, now is a good time to talk to your investment advisor so that you are prepared for what the new year has in store.