You may have heard the news a few months ago that the U.S. Department of Labor had finally released what is commonly being called “the fiduciary rule.” This is a new set of guidelines that covers virtually all investment brokers and financial planners in the nation. The 1,000-page law, set to take effect in April 2017, is intended to protect investors by requiring financial planners and brokers who offer financial advice concerning retirement accounts to act as fiduciaries, which basically means they must put the client’s financial interests ahead of their own.
The law is supposed to prevent advisors from focusing on their own pocketbook instead of the investor’s. It would require brokers to move away from commission-based transactions into simpler fee-based ones. According to three sources we reviewed for this article, many investors, especially those with small to medium portfolios, are especially vulnerable to high-pressure sales – for example, when they roll over a balance from a 401(k) into a mutual fund. These investors, the government argues, frequently see their money directed into mutual funds that charge high fees and pay healthy commissions to the financial advisors. One article from USA Today stated that these high fees and commissions cost investors some $17 billion annually in unnecessary expense. But that’s not all: there are also “backdoor payments and hidden fees often buried in the fine print,” says USA Today.
So the fiduciary rule sounds like a good idea, right? In many ways, perhaps it is. But there are some problems. As this recent article from the NASDAQ website put it, “In the real world, the devil is in the details, and this rule seems particularly devilish.”
First, as with many well-intended government proposals, the law is fiendishly complicated, at over 1,000 pages long. (One source called the law “hopelessly complex.”) With all those embedded regulations, financial professionals are still trying to figure out how the new system is supposed to work. NASDAQ also points out that the new push for fee-based management may save money for those who trade securities frequently, but may end up costing more for the majority of smaller investors who tend to “buy and hold” their stocks. The net result, says NASDAQ, may be that some smaller investors may either pay more, or may not be able to find qualified planners willing to provide advice – a classic case of a bad outcome from good intentions.
But in our view perhaps the biggest problem with the new law is that, with all its complexity, it will probably not accomplish what it was designed to do: ensure that all investors receive objective, appropriate, professional advice about their retirement savings. The NASDAQ article says, “Be aware of what a fiduciary standard doesn’t do: It doesn’t guarantee that the advice you get will be any better or that you won’t lose money.” We fear that naïve investors may be lulled into a false sense of security, thinking that the new regulations will prevent any commission-based planner or broker from taking advantage of them. Sadly, this isn’t the case.
In this article about the fiduciary rule from the Money website of US News, we saw this quote from a Boston-based wealth manager. “When I started my own firm almost four years ago, I spent a lot time asking myself and my colleagues what clients really value the most,” he said. One of his clients gave him the answer, telling him, “Do you know what I have come to realize that I really pay you for? Transparency, simplicity and peace of mind.” This combination of factors, founded on a trust-based relationship, seems pretty sensible to us.
When it comes to selecting a financial planner, we urge you not to fall for some marketing trickery based on the new fiduciary standard. Too many commission-based financial planners will still have as their top objective hiking their own income at your expense. Instead, our strong recommendation is that you select a qualified fee-based planner. If you are truly looking for objective advice, free from the lure of commissions, find a person who charges by the hour and does not sell any financial products. We will be happy to refer you to some highly qualified financial professionals who meet these criteria.
Of course, we also stand ready to assist you with all aspects of your retirement planning. One of the best ways to get started with the process is by attending one of our free LifePlanning Seminars where we will review all aspects of retirement planning: finances, health care, housing choices, legal protection and communication with your family. For dates, times and online registration, visit the Upcoming Events page on this website – or contact us at any time and we’ll gladly assist you.