The Department of Labor has finalized a change in regulation regarding financial advisors. And it has been a long time coming. Advisors who handle clients’ retirement accounts will now (well, actually in 2017) have to act in a “fiduciary” capacity. That is, they will be forced to put their clients’ interests before their own interests. This is a big deal.
Traditionally, most advisors (think: salesmen of commission-based investment products) only had to live up to a “suitability” standard, which permitted them to sell clients investment products that generated high commissions for themselves. Examples of these products include annuities, private placements, limited partnerships, and mutual funds with “loads.” Wondering whether you’re affected by this? Ask yourself (or your advisor) this question: does my advisor’s compensation change depending on what investments he/she recommends or purchases in my account?
The simple version of the story is that the fiduciary standard will soon extend to all retirement account advice. But here’s the more nuanced version: advisors will still be able to sell commission-based products if they can plausibly argue that it’s the best thing for the client (when is that ever true?). Also, conflicts of interest may still exist between advisor and client, but must be disclosed in the advisory contract.
CNBC Contributor and investment advisor Josh Brown argues not much will really change. “Virtually all of the products they sell, where conflicts are a given, will still be allowed under the new rule so long as additional disclosures are made and a “Best Interest Contract Exemption,” or BICE is signed off on by the client. This will be no trouble at all: just picture the speed with which you click “Agree” every time iTunes does a software update, and you can imagine how little of an impediment this sort of thing represents.”[i] Sometimes, the more things change, the more they stay the same.
Fortunately, there is a group of advisors who already live under a fiduciary standard, and who don’t sell commission-based investment products. And that goes whether they’re managing your IRA account or any other type of account. They’re called “fee-only” Registered Investment Advisors. Fee-only means the advisor only accepts a fee for advice (flat, hourly, or percent-of-assets) and doesn’t collect sales commissions or incentive payments when investing client funds. One of the best ways to find a fee-only advisor is to visit the National Association of Financial Planners (NAPFA) website: http://findanadvisor.napfa.org/Home.aspx.
[i]Brown, Joshua. "Wall Street Dodged a Bullet on the Retirement Fiduciary Rule."Fortune. Time, Inc., 6 Apr. 2016. Web. 15 Apr. 2016. http://fortune.com/2016/04/06/retirement-savings-fiduciary-rule.