How the new fiduciary rule may affect your retirement savings


Paul Sisolak

Paul Sisolak

Blog author Paul Sisolak

As a personal finance journalist, Paul specializes in financial literacy, loans, credit scoring and the art of negotiation. He's covered some of the nation's most inspiring financial success stories for national publications including CNN, and US News & World Report and has a passion for helping Americans overcome their debt.

Published January 8, 2017 | 5 min read

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Think about when you’re shopping for a car, a house, a major appliance or some purchase, where some negotiating and haggling is expected. It’s almost always assumed that the salesperson or dealer will try to strike a deal that suits their bottom line, not your finances. Working with a financial advisor doesn’t normally carry that dynamic; there’s a sense of trust, that the advice you’re given is meant for your financial gain, not theirs.But that’s not always the case. Up until now, there’s been no universal requirement for financial professionals advising on and selling investments to put your best interests ahead of their own. Registered Investment Advisors (RIAs) are required to do so, but brokers, agents and others aren’t; they’re merely obligated to make suitable recommendations based on a client’s information, like their age, their financial risk tolerance and basic goal planning. This may risk creating a conflict of interest, blurring the line for many average investors who might not be able to determine if their advisor is acting in their genuine interests, or just merely trying to upsell them. As such, many people may not be matched with the best investments for them, and may be unaware how much they’re actually paying because fees and charges are mired in paperwork difficult for even moderately experienced investors to decipher.Now, the Department of Labor (DOL) is looking to take this relationship with your financial advisor to the next level. Since last year, the investing community has been abuzz over the DOL’s new, upcoming regulation taking effect on April 10, 2017 that will mandate all investment professionals to act as fiduciaries for their clients with accounts earmarked towards retirement. And the fiduciary standard is quite simple: it mandates that a financial advisor holds a duty of loyalty and care to the client, and puts their client’s interests above their own.

The rule seeks to eliminate any conflicts of interest from retirement investment advisors, brokers and agents; we reported earlier that it’s a problem so widespread that it’s allegedly led to more than $17 billion in losses for consumers. By requiring all financial professionals to act in a fiduciary, instead of a sales, capacity, they’ll be legally bound to put your finances first if they stand to gain financially.If you regularly work with an advisor on managing a retirement account, or if you’re thinking of doing so in 2017, this fiduciary rule could affect you in a few significant ways. Read on to see how.

Only retirement accounts will be affected

The new fiduciary rule only has an effect on retirement accounts like 401(k)s, IRAs or other retirement savings plans. Other brokerage or investment accounts don’t apply. Taxable accounts also don’t fall under the new regulations, nor does any non-fiduciary advice given to you before April 10.

Non-commission-based relationships won’t see many changes

If your broker or advisor works on flat fees or asset-based percentages, don’t expect too much to change. The fiduciary rule mostly applies to advisors who work on commissions, since their future earnings are variable according to the products they can sell. Commissions won’t be banned, per se, but if you have an IRA, you may be presented with extensive paperwork or a BICE, a Best Interest Contract Exemption promising that advisors will act in your best interests, disclose all information to you about fees and potential conflicts, and provide a very detailed itinerary of commissions they may earn. This could prove problematic for RIAs who deal with 401(k) rollovers, according to sources, if the client happens to owe fees that are greater than the retirement plan’s fees, which could be perceived as a profit in the best interest of the advisor.Keep in mind that an advisor can still recommend a high-commission-based retirement product to you, but the DOL’s newer, more stringent rules will make it harder for them to profit from it. Experts contend that BICE may be the most cost-effective solution for investors with small accounts, but to avoid any doubt, robo-advising is another good option.

Independent advisors may bear the biggest changes

Expect the new DOL rule to have the greatest effect on independent investment brokers, agents and advisors. They may struggle to remain compliant and be tasked with investing their own money to train and get up to new technological and procedural standards, to stay in line with the fiduciary law.

You may or may not see better investment returns

For some investors, the differences the fiduciary rule will have on your investment returns may be minimal. If your broker works on commission, the fee structure may change, and they’ll be obligated to give you advice that could lead to better financial decision making without any conflict of interest.If they’re fee-based, nothing will likely change, but it all depends on your individual financial portfolio and investing situation.

After April 10, if you feel your best interests aren’t being served, you may be able to take your financial advisor to court and seek monetary damages. Don’t get all litigious and sue-happy, though; you’ll need to give your advisor a chance to talk with you about the changes and produce all the necessary paperwork. To offset this legal risk, you can, however, anticipate seeing advisors make the switch to fee-based accounts and products to minimize their legal risk and ensure that they’re meeting their new fiduciary role.

You’ll still need to stay vigilant as an investor

The upcoming DOL rule is a boon to investors and a testament to better, more transparent investment advising. But don’t expect the best, most lucrative deals to be handed to you on a silver platter. You’ll still need to use your best judgment when selecting the products you buy and the accounts you invest money into. Advisors won’t be obligated to recommend only the lowest cost products just to save you money. But the rule does mandate that if a fiduciary does recommend a higher-priced product to you, they’ll need to stipulate clear-cut reasons why, like a more expensive investment vehicle for an up-and-coming industry that may provide better gains down the road.For more information, check out the Department of Labor’s fact sheet on the upcoming fiduciary rule.

Image: Ken Teegardin