What it means for investors: Rules for financial advisers are changing
A big change for investors is set to come down the pipe Wednesday. That's when the Department of Labor unveils the final version of its long-awaited fiduciary rule, which is designed to ensure that investment advisers are putting their clients' interests ahead of their own when it comes to fees and investment choices. Liz Davidson, CEO of financial education company Financial Finesse and the author of What Your Financial Advisor Isn't Telling You, helps fills in the blanks for investors ahead of the ruling.
Q: What does the rule mean?
A: Under the Department of Labor’s fiduciary rule, financial advisers providing investment advice for retirement accounts (including employer-sponsored retirement accounts, Individual Retirement Accounts and even many Health Savings Accounts) will now be subject to a fiduciary standard, which requires them to put the client’s interest first, rather than the looser suitability standard that simply requires that an adviser have a “reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through reasonable diligence.”
Hey, investors: New fiduciary rule has your back
A fiduciary standard, on the other hand, requires the adviser and the company to act with the care, skill, prudence and diligence that a prudent person would exercise based on the current circumstances. Both the firm and the adviser must avoid misleading statements about fees and avoid conflicts of interest. This is great news for consumers. The end result is that the new rule will now align the interests of both the investor and the adviser and put them on equal footing when it comes to all the information they both need to make the best decisions.
Q:How do I know if my investment adviser is a fiduciary?
A: Ask to see a fiduciary agreement in writing. If your adviser is compensated even partly from commissions from investments they sell you, they’re probably not acting as a fiduciary. The DOL offers this guide for consumers on how to tell if your adviser is a fiduciary. Some examples of personal financial advisers that are already acting as a fiduciary whose status can be verified online are Registered Investment Advisors (RIA) and “Fee-Only” professionals who are members of NAPFA (the National Association of Personal Financial Advisors). Some retirement plan advisers who offer employee benefits already act as fiduciaries, as do CFP professionals when offering financial planning advice. However, many CFPs work for brokerage firms who follow the looser “suitability” standard when it comes to investment advice.
Q:What will be the effect on fees?
A: The expectation is that advisers required to act as fiduciaries will recommend lower-fee investments to their clients. The DOL has estimated that this will save investors up to $40 billion in fees over the next 10 years. The practical implication of the fiduciary standard is that when choosing between two otherwise very similar investments, a fiduciary would choose the one with the lower costs. This is very helpful as the structure of much of the financial services industry is full of inherent conflicts of interest that don’t always favor consumers.
Q:Will this new rule be hard on advisers?
A: This rule isn’t much of change for advisers who already hold themselves to the fiduciary standard, and will not have a big effect on their business model (but could lead to some compliance and paperwork changes). For those who are new to following the fiduciary standard, there could be a lot of long-term benefit to advisers here in that customers will now know that the adviser is legally and ethically required to work in their best interest, which fosters greater trust in their guidance and can lead to a more fruitful relationship for both over time. For advisers whose business model depends on high fees and commissions, the rule is going to be disruptive, and those advisers may want to look at this rule as an opportunity to adapt their business model to one that serves the best interest of the consumer, or face losing clients to the myriad more transparent and lower-cost options out there.
Q: How will it affect the average investor?
A: The fiduciary rule will have a positive effect on the average investor because it now places that investor and the adviser on the same side of the table. Investors should see their costs go down over time and their trust in advisers go up as they experience more transparency in fee and compensation disclosure, and know that the adviser is held to a recognized legal standard to uphold the investor’s interest over their own. Investors who don’t meet the minimum account standards for traditional advisers still have many great, low-cost options. Those investors may want to consider working with a financial adviser that charges a flat hourly, monthly, or annual fee instead of an asset-based fee. Another option is one of the new “robo-advisers” that typically charge lower fees and have lower asset minimums. Many reputable online investment firms, such as Vanguard, offer low-cost investing and inexpensive telephone guidance from financial planners. Investors who have unbiased financial wellness programs as an employee benefit can also get free financial education and guidance to help them make their own investment decisions.
