Advisers, Fees and Fiduciary Rules … Oh My

Earlier today, the Department of Labor today released long-awaited regulations that will likely have a significant impact on the way retirement advice is delivered throughout the country. These regulations, known as the ‘fiduciary rules’ or ‘fiduciary standards’ are scheduled to into effect by January 1st, 2018.

Registered investment advisers have already been held to a fiduciary standard of sorts. The Securities and Exchange Commission’s (SEC) fiduciary rules encourage RIAs to avoid conflicts of interest but do not explicitly prohibit them as long as the conflicts are disclosed to clients. However, the Department of Labor fiduciary rules are more along the lines of the Employee Retirement Income Security Act (ERISA) rules that govern qualified retirement plans such as 401(k) plans. These rules prohibit certain transactions and don’t allow for conflicts of interest even when disclosures are made to the client.

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The new protections will require financial professionals to put their clients’ interests before their own financial gain when offering individualized retirement advice. Simply put, the practice of some advisers is to steer clients toward products or services that might not necessarily be good for the client but pay the adviser a handsome commission. There are already factors – taxes and inflation chief among them – working against you as an investor. Fees for poor advice doesn’t need to be another.

While holding the client’s interest in the highest regard might have seemed like a no brainer, many financial advisers were previously held to a lower, so-called ‘suitability standard’ that required them only to sell products that were suitable enough for the client. Brokers who sold products on commission could legally steer clients to a mutual fund that paid the broker more than a fund that might have been a better option for the client, as long as the product was deemed suitable for the client.

One of the things you are likely to hear from opponents of the fiduciary standard is that the regulations will increase compliance and other costs for financial services firms, making it too expensive for them to serve their lower-balance customers and leaving those investors priced out of the market for advice.

Some speculate that this void will be filled by robo-advisers, or firms that offer automated portfolio construction and management for a lower fee than a traditional professional adviser. Maybe. Maybe not.

In any event, my hope is that these rules will have at least three impacts. First, the bad actors will be forced from the stage. Second, the advisers who remain will truly focus on the client’s best interest. Third, and most importantly, as efforts are made to improve financial literacy, there will be less of a need – or a limited need – for advisers.

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

15 Comments

  1. I’m generally against more government intervention and regulation, but I think this is a step in the right direction. There’s a reason so many distrust financial advisers, and the fact that some get commissions based on products sold is a big reason.

    • Agreed. I think these particular rules have a chance to really benefit the individual investors.

  2. If the costs for following the new standards seem prohibitive to advisors, I think they’re smart enough to create legitimate ways of becoming more competitive. Like Larry, I often feel more regulation is a bad thing. And while there’s no good excuse for remaining ignorant about finances, I still can’t help having empathy for investors who don’t know what to do, or how to start. By now “You MUST save for retirement” has been drummed into everyone’s heads. Pity the person who finally gets enough nerve to sock away some money into investments and gets burned by an advisor who had hidden his fees and commissions. I think the new rule is a good thing. Time will tell if it makes a bit of difference. But in any case a little buyer beware attitude can’t hurt.

    • All well stated. I will be interested in seeing what changes transpire once the rules go into effect. Thanks for sharing your thoughts, my friend.

  3. Just as a background, fiduciary means acting in good faith of best interest of your client/company (at least from an accounting perspective). Hopefully these new acts will indeed increase financial literacy among many people. I am actually going to be putting out an interesting article this weekend that will show the need for financial literacy so look out for that!Very informative post as always James!

    • Looking forward to your post, my friend.

  4. Let’s hope it has the impact of improving financial literacy. We all know there are plenty of people that need to be better educated in money matters.

    • Indeed. While I do believe the fiduciary rules will be helpful, the single most helpful action is for people to educate themselves. After all, no one will look after your money like you.

  5. Lol, I kind of read that last part as what’s worse.. getting screwed over by bad advice or being stuck fending for yourself financially. Well, if you really don’t want to learn a thing about investing, I’m not sure one option is “worse” than the other. So far roboadvisers seem to screw people over less.

    • “I would guess a generic robo-adviser would be better than taking a beating via unnecessary and/or high fees.” Like physical health (asking detailed questions of your health provider, getting a second opinion if necessary, eating right, working out, not smoking, etc.) I view fiscal health, first and foremost, as a responsibility of the individual. That is not to suggest that if someone elects to remain financially illiterate, and put all their trust in an adviser, they deserve to get ripped off. However, it does mean each individual should do all they can to educate and help themselves.

      Thanks for stopping by and sharing your thoughts, my friend.

  6. We will see what kind of impact comes from the new rules. I’m skeptical any of the bad actors will leave the industry, until a bunch of them lose their licenses…..or better yet, go to jail. I think the concept of the protections you’ve outlined is important, and I am always a fan of improving financial literacy.

    Thanks for sharing James! I hope you week is going well
    -Bryan

    • I consider bad actors to be those who aren’t really looking to provide sound financial guidance – in fact, they are likely not that knowledgeable – and are really nothing more than salespeople. I suspect that many of those in the game strictly for commissions will exit soon after the rules are adopted. Hopefully what we will get to at some point is a populace that is more financially savvy, able to make investing decisions on their own, and have confidence that when they do seek the services of a financial adviser the guidance they receive is given in good faith and not for other ulterior motives. Of course, the most important factor in all of this is individual behavior. Ultimately what matters most is that people become financially literate and take more responsibility for their financial well-being.

      Thanks for stopping by and sharing your thoughts, my friend.

      • God willing James, God willing! We’ve all heard the “adviser” horror stories. I just can’t believe the good advisers haven’t raised a bigger fuss about kicking the dumb salespeople out. Oh well, must be a lucrative industry :o/
        -Bryan

  7. I see this as a huge win for the community at large (and that is coming from somebody who got a degree in Finance). Usually I am against more regulation, but I see this as a smart addition. It is currently too easy for investment advisers to hide what is actually going on, and people just do not understand the long-term impacts. Although I do believe in personal accountability and people should do their own due diligence, by the time some of the scandals in an investment setting can come to light it is too late. Also, the long timelines make it very difficult for the market to force any real change.

    • All well stated. Even seemingly small fees can have a significant impact over the long-term. Ideally, the more aware investors are of the fees and their impact, the more they will educate themselves and practice better due diligence on the occasions they believe an adviser is in order.

      Thanks for stopping by, my friend.

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