What new advisor rules mean for your retirement savings
New Labor Department regulations on advisors who have their hands in your retirement accounts require them to act in the best interests of clients. There are plenty of good advisors out there who already follow this rule. But there are also plenty who don鈥檛.
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You know who has your financial best interests at heart? We鈥檙e guessing that 鈥淲all Street鈥� is not the first answer that comes to mind.
Sure, there are plenty of good eggs in the financial services industry 鈥� money pros truly committed to delivering unbiased financial advice to help consumers achieve their life goals. And to them we say 鈥渢hank you,鈥� because there aren鈥檛 a lot of legal or financially rewarding reasons for them to do so.
That鈥檚 all changing thanks to a聽, which puts new regulations on advisors who have their hands in your retirement accounts. The media聽has been all aflutter about this. (Wall Street greed vs. unsuspecting Main Street is headline gold.)
But what does it all mean for you 鈥� the consumer, investor, IRA saver, 401(k) contributor? Here鈥檚 our guide to walk you through the new rule.
What鈥檚 this thing all about, anyway?
This fiduciary rule requires financial advisors and brokers who provide advice for retirement accounts to act in the best interest of their clients.
This is the kind of rule that you would hope wouldn鈥檛 be needed 鈥� kind of like聽聽with a kid on the fender of your car 鈥� but, well, it is.
As we said, there are plenty of good advisors out there who already follow this rule.聽But there are also plenty who don鈥檛, and this is the Labor Department鈥檚 attempt to protect investors from those bad apples. (For your light reading pleasure, here are all the details on the聽)
Fiduciary 鈥� what?
聽is a fancy term for advisors who don鈥檛 put their own profits over the needs of clients. If you鈥檙e a fiduciary, you鈥檙e held to a fiduciary standard, which means the same thing.
Under this rule, advisors and brokers who provide investment advice for retirement accounts must now be fiduciaries. (Here鈥檚 a good rundown on聽.)
What problem is this new rule addressing?
Currently, many advisors and brokers are subject only to a 鈥渟uitability standard鈥�: If an investment is deemed a good fit for your needs, an advisor can put you in it.
As you might imagine, there are plenty of investments that might be loosely defined as a 鈥済ood fit.鈥� Unscrupulous brokers聽could聽choose the ones that would line their聽pockets with the highest commission. No more, once the new regulations go into effect.
When does it take effect?
Many of the basic regulations 鈥� the best interest standard 鈥斅爓ill go into effect in April 2017; others won鈥檛 be implemented until 2018. There鈥檚 also a chance of a court聽challenge.
What鈥檚 considered a 鈥榬etirement account鈥� under this rule?
Roth and聽, 401(k)s and 鈥� this is a surprise 鈥� some聽.
Are you saying that I鈥檝e been getting bad 鈥� or at least biased 鈥� investment advice?
While we haven鈥檛 had the pleasure of meeting or evaluating the financial pros on your payroll, we can say that the system in which they operate has long favored those giving the advice over those receiving it.
When a person鈥檚 take-home pay is tied to bonuses and commissions 鈥� and those financial rewards are based on selling the products that make the company more money (versus recommendations that make the client the most money) 鈥� salesmanship, not stewardship, is rewarded.
That said, not everyone in the industry is just looking out for No. 1. And the聽聽has (hopefully) cut down on the number of 90-year-olds put in high-risk, small-cap mutual funds. But binding an advisor to recommend products that are 鈥渟uitable鈥� is a pretty low bar and doesn鈥檛 exactly scream 鈥渃ustomer first.鈥�
After all, a broadly diversified mutual fund with a 1.2% sales charge may be perfectly suitable for a particular client. But isn鈥檛 a mutual fund that has the exact same investment objective and risk profile with a 0.2% expense ratio 鈥渕ore suitable鈥�? That鈥檚 the conflict that the new fiduciary rule聽seeks to clear up.
What are the聽exceptions?
The new rule says that a fiduciary cannot accept payments that create conflicts of interest. Fine. But the Labor Department has offered an exception that many brokers are likely to latch on to: Firms can continue to accept the types of compensation they do now (notably commissions and revenue shares) as long as they commit to a 鈥渂est interest contract鈥� exemption called a BIC.
The BIC still requires firms and advisors to act in a client鈥檚 best interest 鈥� are you getting tired of that phrase yet? 鈥� and requires that they disclose (on their websites) what amounts to every minute detail of how they are paid.
And the rule says education doesn鈥檛 constitute advice, unless a specific recommendation is made. There was some concern that advisors would have to push a paper across the table to be signed before even talking to a prospective client; that鈥檚 not so.
This sounds great! Why would anyone oppose this?
How much time do you have? The Labor Department received聽聽over a five-month period about this thing. You鈥檇 probably oppose it if you were an advisor who鈥檚 been making a pretty good living off 鈥渟uitable鈥� investments.
But is there a downside for consumers?
You know how airlines tack on fees like bite-sized, individually packaged pretzel snacks? As it tends to go in situations like this, some costs will probably be passed along to the little guy. That means some advisors will raise their fees to account for money lost due to the regulation.
Even if you don鈥檛 work with an advisor now, there鈥檚 a chance you might want to work with one in the future. Assuming you haven鈥檛 swiftly accumulated millions between now and then, the rule may make that harder. As more advisors shift toward a fee-based compensation program, there is concern that they won鈥檛 want to deal with small聽accounts.
On the other hand, it could save retirement investors money, says Kyle Ramsay, NerdWallet鈥檚 investing manager. 鈥淭his ruling should better align the interests of investors with those providing advice, which would potentially result in better returns and lower fees.鈥�
I don鈥檛 have an advisor, so I won鈥檛 be affected, right?
You still might see more paperwork. For example, part of the regulation is an attempt to protect investors as they roll a 401(k) into an IRA when leaving a job. Brokers may not聽be able to suggest you do that without first signing a BIC.
Does everyone in the financial services industry lack a moral compass?
Have you seen 鈥淭he Wolf of Wall Street鈥�? Just kidding. That鈥檚 not a fair way to characterize the entire industry. Still, working in the financial services field can put a strain on the moral fiber of even the most upstanding citizen.
If you were paid more for putting clients into a certain product that earns your company (or you directly) more money than other nearly identical choices that cost your clients less (even just slightly less money) but made you and your firm bupkis, what would you do?
Of course, there are some people who sleep just fine knowing the advice they give is 鈥渘ot bad, per se鈥� or at least 鈥渂etter than what John down the hall is getting his clients into.鈥� But there鈥檚 a giant gray area that exists between 鈥済ood for the client鈥� and 鈥済ood enough.鈥�
Ultimately, who鈥檚 the 鈥榳inner鈥� with this rule?
Consumers, of course. And some advisors, too. Within the investment industry, advisors who are already fiduciaries are pretty happy with this rule. That includes human advisors, but also聽聽鈥� companies that use computers to manage client investment portfolios.
鈥淥nline advisors like聽听补苍诲听聽will be attractive options for investors, as automation and software enable them to help smaller accounts with less overhead and thus lower fees,鈥� Ramsay says. 鈥淭hey are already regulated by the SEC and abide by the fiduciary standard.鈥�
Bottom line: No one has your best interests at heart more than you. So no matter what the rules passed, forms signed, oaths taken, it鈥檚 on you to do your due diligence 鈥� checking up on a financial firm or an聽advisor鈥檚聽听补苍诲听聽鈥� before entrusting your money to anyone.
Arielle O鈥橲hea and Dayana Yochim are staff writers at NerdWallet, a personal finance website. Follow them on Twitter:聽听补苍诲听.
This article first appeared in NerdWallet.聽