You might’ve heard something about a new federal ruling affecting your retirement accounts. According to new regulations issued this week by the Labor Department, financial advisors and brokers who manage individual retirement accounts (IRAs) and 401(k)s must act in accordance with their clients’ best interest by following the "fiduciary standard."
Hold on a minute, you might be thinking, hasn’t my financial advisor always acted in my best interest? Most people assume that their advisor is legally obligated to provide the best advice possible, but until now, that wasn’t always the case. Instead, they were held to the "suitability standard," which meant that they only needed to recommend "suitable investments," i.e. something that more or less fits your needs.
This, however, led many brokers to suggest expensive funds that pay the advisors higher commissions despite the fact that cheaper alternatives exist. The Obama administration estimates that actions like this have cost the American public about $17 billion.
The fiduciary standard isn’t new — advisors and companies regulated by the SEC are required to follow the fiduciary rule, meaning they put their clients’ interests first. The new regulations would expand the fiduciary rule to a wider group of professionals, specifically targeting advisors who handle IRAs, 401(k)s, and other retirement accounts.
What do the new fiduciary rules mean for me and my retirement accounts right now?
At the moment, nothing. The new regulations don’t go into effect until April of 2017, a full year from now.
Will I end up saving money when these regulations go into effect?
Ideally — the goal of these regulations is to force advisors to recommend the cheapest investments that work for you, or to justify to you why a product with a higher fee is the better product. This may mean that your fees are lower in the future than they are now. The Department of Labor believes that this regulation will save Americans $40 billion over the next decade.
How do I know if my advisor currently follows the fiduciary rule?
Depending on your advisor, they might already follow the fiduciary rule. All Certified Financial Planners, for example, act as fiduciaries when offering retirement advice. However, if you have an advisor from a larger brokerage firm, there’s a good chance they’re using the suitability standard. Check out the Department of Labor’s guide to figuring out which standard your advisor is following. You can, of course, ask them, but you’re likely to get a boilerplate response saying that they always keep your best interests in mind.
If my advisor already follows the fiduciary standard, is anything going to change for me?
Nope — you already have a trustworthy advisor who is looking out for your best interests.
Is this bad for small businesses?
You might hear arguments along those lines — that these regulations will make it more difficult for mom and pop advisors to compete with big banks and may force some to close their doors. Why? Critics of the regulation say it will lead to higher compliance costs and lower fees, which will make it more expensive for advisors to service smaller accounts. I wouldn’t worry about this too much, though: if your local advisor relies on big commissions to pad their profits, they probably aren’t the best financial advisor for you. Plus, there are a ton of new online solutions for smaller accounts.
Seems like it's good for consumers overall.
Yep! Consumers should save a ton of money. Plus, it should be good for advisors, too — clients will feel more comfortable with their advisors because they know advisors are legally obligated to look out for their best interests.
I don't have a financial advisor. How do I find one?
Check out GuideVine — it’s kind of like a matchmaking site for consumers and financial advisors. You can read our review of it here for more information. The best part about GuideVine, though? All of their advisors have to follow the fiduciary rule.
Image: Hortensia Whitworth