Department of Labor’s Fiduciary Rule
What investors need to know
You have probably read about the U.S. Department of Labor’s (DOL) new fiduciary rule that will impact financial advisors and their clients. Simply stated, the DOL’s new “fiduciary duty” standard requires financial professionals who receive compensation for transactions to act in their client’s “best interest.”
That means advisors must, for the first time, provide full transparency around the fees and commissions they charge for retirement plan advice and products. And illustrating the importance of fees and how small differences can add up, the DOL even provided the math:
“A percentage point lower return could reduce savings by more than a quarter over 35 years. In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period; after adjusting for inflation, it would be just over $27,500.”
Who Will Be Affected?
The DOL’s rule and related exemptions will require all retirement advisors, whether fee- or commission-based to adapt and practice a fiduciary standard that puts their clients’ best interests first and foremost. And retirement advisors have until 2018 to acclimate to this new fiduciary rule.
According to the National Law Review, the final rules will likely impact broker-dealers the most, Registered Investment Advisors the least, and with insurance companies somewhere in the middle. “Record-keepers who have insurance companies or mutual fund manager affiliates will be impacted more than independent record-keepers. And, while not directly affected by the new rules, mutual fund management firms need to understand their impact, for example, the needs of broker-dealers in this new environment. At this point, though, it is impossible to know all of the repercussions. Stay tuned.”
A skeptical investor might ask:
“If you weren’t always acting in my best interest, whose best interest were you acting in?”
Well, that’s a great question and the first one you should ask your financial advisor. I might also suggest you ask the following questions:
As my financial advisor, will you do your best to evaluate my long-term goals and recommend investment ideas to help me achieve them?
In the course of our business relationship and because there are times when you may buy and sell investments for my portfolio, what is the range of fees and commissions you might receive?
Do you a promise to act in my best interest on all matters related to advice and investment recommendations for my retirement portfolio?
Do you or your firm have any potential conflicts of interest with decisions you might make on my behalf?
These five questions will undoubtedly lead to more questions and the more you are informed, the better off you’ll be. And while your advisor might ask you to sign new paperwork attesting to your understanding of this new fiduciary rule, remember the most important question of all: If you weren’t always acting in my best interest, whose best interest were you acting in?
Article written by John Drachman.
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