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.
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.