The Department of Labor’s Fiduciary Rule went into effect – at least partially – on Friday. Like many things in Washington, the Fiduciary Rule is a complicated name for a very simple concept: your financial advisor should always be required to act in your best interest, not their own, when advising on retirement investment accounts.
What does this actually mean for you as a client?
- Your advisor should never legally be able to sell you an investment product that isn’t right for your financial situation, just so that they can put more money into their own pockets
- You should never be charged hidden fees
The reason some financial institutions are fighting the rule is because they’re afraid it will hurt their bottom lines. What they’re not realizing is that their bottom lines face an even bigger threat – a lack of trust among their clients. Our recent Personal Capital Financial Trust Report conducted with Nielsen found that nearly one-third of Americans believe that a financial advisor is likely to take advantage of a consumer.
This mistrust isn’t the most alarming thing about the situation – what’s even more concerning is the lack of awareness about how advisors work and what they charge.
This mistrust isn’t the most alarming thing about the situation – what’s even more concerning is the lack of awareness about how advisors work and what they charge. Nearly half of Americans surveyed mistakenly believe that all financial advisors are required by law to always act in their clients’ best interest. And nearly 21% of investors aren’t sure how much they pay in fees on their investment accounts, and another 10% of their fellow investors don’t know if they pay anything at all.
Going Beyond the Fiduciary Rule
The Fiduciary Rule is a major step in the right direction when it comes to protecting investors, but there’s still more that needs to be done. First of all, the rule comes with plenty of loopholes since it doesn’t apply to all investment accounts – it currently only applies to retirement assets. And while it’s been partially implemented on June 9, full implementation doesn’t occur until January 1, 2018 – leaving plenty of time for those opposed to try to change or weaken it.
So how can investors protect themselves beyond the Fiduciary Rule, whatever its fate may be? Here are some good questions to ask your investment professional to determine if he or she is acting in your best interest:
- Are you a fiduciary? Only financial advisors who are fiduciaries are required by law to act in the best interests of their clients, both on retirement accounts and other investment accounts.
- Do you have an adequate investment in technology? Up to 60% of registered investment advisors (RIAs) haven’t made adequate investments in technology, such as basic financial planning advisor. You should seek out a fiduciary-only independent RIA who has the software to provide a transparent view of your entire financial life. If unable to see your entire financial situation, how would he or she be able to provide you with holistic financial advice?
- How are you compensated? It’s not easy in many cases to find out how your advisor or broker is compensated. Brokers can sometimes be incentivized by compensation from mutual fund manufacturers on products they sell to their clients, the amount of cash in their clients’ portfolios, and the frequency of trading transactions. These costs are often buried in prospectuses and fine print, which can erode portfolio values and years of your retirement.
If the Fiduciary Rule ends up being implemented as it was originally intended, it should lead to more trust in the financial industry and more money in investors’ pockets. But even without it, we need to do our part – the financial services industry must provide investors with more transparency, along with tools that empower them to better understand and control their financial lives. And you should never be afraid to ask the difficult questions and move on if you don’t like the answers.
A version of this appeared on The Hill. Read the full article “Why the Fiduciary Rule is Not Enough to Protect Investors”