How New Financial Rules Might Affect Your Retirement

Jalene Hahn |
AUTHOR: Mary Fetzer — August 9, 2016 (This article originally appeared on Avvo stories and has been republished with permission.)

New regulations require paid financial advisers to adhere to a “fiduciary standard” instead of the much weaker “suitability standard” when recommending retirement investments. What do these regulations mean for consumers? And how can we ensure that our own personal advisors are adhering to the new standard?

The fiduciary standard in a nutshell

On April 6, 2016, the Department of Labor announced a new fiduciary standard of care for brokers who provide retirement advice. Prior to the announcement, commission-based brokers were held to a less-stringent standard, requiring only that advice or product offerings be “suitable” as opposed to “in the best interest” of the client.

“The new ruling is an important first step toward greater transparency in the entire industry,” says Mathew Dahlberg, who runs the wealth management firm Main Street Investments in Kansas City, Missouri. “At its core, the fiduciary standard means that an advisor must always act in their client’s best interests as prescribed by law.”

So what, exactly, does that mean?

“As a practical matter, this means that the advisor must always disclose conflicts of interests between themselves and their clients,” says Dahlberg. “This distinction gets right to the heart of the advisor’s incentives.”

Dahlberg provides this example: An advisor who doesn’t have to act in a fiduciary capacity, such as a broker, could recommend an investment to their clients while at the same time selling that same investment in their personal account. A fiduciary advisor could never lawfully engage in such a practice.

Is your financial expert obliged to comply?

Consumers can come right out and ask if their advisor is a fiduciary, but it’s a bit of a loaded question. “You should be aware that the law allows some financial advisors to act as fiduciaries in some transactions while adhering to the suitability standard in other transactions,” explains Dahlberg. “Therefore, it is important for the consumer to get in writing that the advisor is always acting in a fiduciary capacity. An easier way is to simply make sure that you engage an RIA [Registered Investment Advisor] instead of a broker or dealer. While many of the latter are now often pledging to act as fiduciaries in their client relationships, only the former are legally required to do so at all times.”

The good news is that if an advisor doesn’t adhere to the new standard, at least a consumer will have an avenue of recourse in the event of losses.

But is it all it’s cracked up to be?

The rule will not go into effect until the end of 2017, but it “paves the way for a greater standard of care,” says Timothy Baker, founder and CEO of Wealthshape LLC, a Connecticut-based financial advisor specializing in low-cost quantitative investment management and fiduciary advice. “It demands more transparency from the brokers and shines a light on the ‘suitability versus fiduciary’ delineation.”

But the new standard is not perfect. “There are caveats to the rule that I’m not a fan of, the largest being that it only applies to retirement accounts and not taxable investment accounts along with the best interest contract exemptions,” says Baker. “However, while I and others believe a fiduciary standard should apply to all investment advice, this appears to be an important step in that direction.”

Others aren’t so sure. “I wish the new rule were truly as significant as the headlines suggest, but intense broker and insurance industry lobbying has prevented implementation of a true fiduciary standard,” says certified financial planner Warren Ward of WWA Associates in Columbus, Indiana. “Attorneys owe such a duty to their clients, but brokers and agents owe theirs to their employer.”

Ward explains that the Investment Advisors Act of the 1940s has created a relationship between the brokerage industry and the Securities and Exchange Commission (SEC) that is so intense that it has prevented enactment of such a standard for the entire industry. “Instead, the Department of Labor has tried to do so by itself, at least to extent that investments are part of its world—basically 401(k) plans and rollovers.”

Between now and when the new rule goes into effect, there are likely to be challenges to its full implementation. “In addition,” says Ward, “some of the most unsuitable investment options—proprietary funds, non-publicly traded REITs [Real Estate Investment Trusts], and variable annuity contracts—will still be allowed under what’s known as a Best Interest Contract Exemption (BICE).”

“Any financial advisor who isn’t willing to state a fiduciary duty toward the client is in effect stating that his or her duty remains with the agency or brokerage company and not with the customer,” cautions Ward.

“At this point, the rule’s greatest value is the increasing awareness,” observes Ward. “It’s time for investors to begin asking themselves, ‘Wait a minute, why hasn’t my advisor always been acting in my best interests?’”