Despite a bitterly contested battle by brokers, banks and insurance companies to kill it, the on-again, off-again Department of Labor Fiduciary rule becomes effective June 9, 2017. Investors should cheer the news.
That’s right; it is no longer just a slogan that slick marketers use to woo unsuspecting retail investors into their fee-based, commission-based, fee-sharing web of duplicity and immoral behavior. Since I am already a fiduciary, I tried over the years to advise readers on what is in their best interests since their advisers certainly were not. The new law changes all that.
If your advisor, broker, wealth manager, banker, et al provides you retirement advice for a fee, they are required to act in the best interest of their client. This rule covers all tax-deferred investment accounts. Ordinary taxable investment accounts are excluded from the rule.
“But hasn’t my broker been acting in my best interest all along?” you might ask.
The simple answer is no. Previously, the law states that as long as he or she puts you in a suitable investment they were within the letter of the law. Suitable does not mean the lowest cost or best performing fund, stock or any other financial security. It just means they can’t put a 92-year-old grannie into a two-cent biotech stock that she knows nothing about.
A number of brokers, annuity shops and others have already abandoned ship sending out letters to their customers that they will no longer be managing their IRAs, 401(k) s and other tax-deferred accounts. These notifications have distressed many elderly clients, for example, who have established long and trusting relationships with their advisors, despite the suitability- only rule. I understand that. There are brokers out there that genuinely do care for their customer’s well-being. It is not the individual that you need to worry about; it is the managers that he reports to and the organization he works for that is the real problems.
Balancing the demands of their firm, versus protecting their customer is a dilemma that many in the financial services sector face every day. The new Department of Labor rule makes it easier for many to do what is in their customer’s best interests.
Studies suggest that over a life-time of savings, the typical investor has paid out one third of their saved, retirement assets in fees. From the government’s point of view, they are condoning the payment of roughly $4 billion per year in fees by savers on the total $3 trillion in assets that represent the tax-deferred savings pool.
In a world where defined benefit plans and pensions for life have disappeared, it is now the American public’s responsibility to save for retirement through government sponsored tax-deferred savings accounts. But most of that public has no financial background or education, and yet they are left on their own to make investment decisions.
Until now, financial advisors, who were not fiduciaries, simply compounded this problem by giving advice and charging fees that were not necessarily in the public’s interests. Good advice can make the difference between a satisfying retirement or bagging groceries for income at the local supermarket. Anything that helps savers achieve the former (rather than the latter) has my vote.