Starting Friday, a new federal rule could mean big changes for your retirement savings.
After nearly a decade of back and forth between the financial industry and consumer advocates, the Department of Labor is rolling out the first phase of the so-called fiduciary rule, which requires financial advisors to act in your best interests. As of Friday, anyone who handles retirement assets and gives advice—this includes financial professionals of all types, whether they call themselves brokers, financial advisors, financial planners, or wealth managers—must adhere to a new “impartial conduct standards.”
Those standards also require advisors to charge reasonable rates—and bar them from lying to or misleading you about the products (such as mutual funds, ETFs or annuities) they’re recommending.
If you thought your financial advisor was already required to do this, you’re not alone. Almost half (46%) of Americans believe that all financial advisors are required by law to always act in their clients’ best interest, according to a recent Personal Capital survey.
That is indeed true for many financial planners who charge fees rather than commissions—but until now, it hasn't been true for everyone. And even the new fiduciary rule will apply only to advisors working with your retirement assets—for most people, that’s a 401(k), or a Roth or traditional IRA. The taxable, brokerage account you may have is not affected.
The new rule has the greatest effect on financial advisors who are registered as brokers. In the past, these only had to follow a less stringent “suitability” standard, which allowed them to recommend options that would cost you more—and pay them more—even if cheaper or better options were available.
In the months leading up to Friday’s rollout, there’s been a lot of uncertainty around whether President Trump’s Labor Department would actually implement the Obama-era regulation. So if you’ve been waiting to see how this will all shake out, now is the time to pay attention. Here’s what you need to know:
This Is Just Phase 1
It's important to understand that the fiduciary rule is set up as a phased rollout. While the new obligations to clients are going into effect now, the rule's remaining provisions (including one that would allow investors to bring class actions) are slated to roll out on Jan. 1, 2018. There is also a Labor Department review underway to determine if the second part of the rule is necessary.
That phased rollout also means there won't be much federal enforcement at this point. The Labor Department has said it won’t penalize anyone who doesn’t follow the new standards until they are completely finalized. Yet investors can still bring claims through the industry's arbitration process, says Fred Reish, a partner with Drinker Biddle specializing in fiduciary issues. "The non-enforcement policy doesn't stop that," he says.
It’s important to pay attention to any changes and not let your guard down. “People need to take the management of their money seriously—they work hard enough to get it, so they should really work hard to understand what’s occurring with it,” says Marcia Wagner, an attorney specializing in retirement and securities laws.
You Should Expect a Ton of New Ads and Marketing Promos
Some firms see an industry-wide fiduciary standard for retirement accounts could be a big business opportunity. For years, fee-only financial planners have sold themselves as “true” fiduciaries, but now advisors at Merrill Lynch, Wells Fargo and other big firms can say the same thing. In fact, they're already taking out ads doing exactly that.
Your Advisor May Ask You to Restructure Your Account
Several big firms, such as Merrill Lynch and LPL Financial, have already announced they may need to transition some clients from a commission account to an advisory account—where you'll pay a quarterly or annual fee for advice, rather than having your advisor get paid a commission on funds you buy. Those firms say these accounts will help them comply with the rule, because advisors may face conflicts of interest if they’re getting paid a higher commission to place you in one fund over another.
If you already have an advisor and a commission-based account, it’s worth closely examining whether switching to a fee account is really the best move for you—because you may end up shelling out more. If you only purchase a few shares once a year, paying a small commission on those trades is likely cheaper than paying an annual, ongoing fee. That's particularly true if you don't need a lot of ongoing financial advice and guidance.
“There’s a strong incentive for firms to move investors into fee accounts because it’s easier to supervise and the fees are a more steady income stream,” says Barbara Roper, director of investor protection at the Consumer Federation of America.
If your costs are going way up and you’re not getting a lot of additional services—or you’re getting services you don’t want or need—it may be a sign you have a "culture problem" at the firm you’re dealing with, Roper says.
You'll See What You’re Paying For
Under the new rule, there’s a push for firms to be more transparent around the fees you’re being charged. That means your statement may look different, particularly if you have been using a commission-based advisor. You may have been paying higher fund fees, for instance, even if you didn't see those fees directly. New statements may show a clearer breakdown of fees you're paying both for funds and for advice.
Don't panic if you suddenly see new fees, experts say. “It should be more transparent—you’re hopefully going to get something that should be clearer than your cell phone bill,” says Paul Ellenbogen, Morningstar’s director of global regulatory solutions.
Your Advisor May Recommend New Funds or Other Products
Expect your advisors to offer you a bunch of new financial products, including new annuities and fund classes, in the wake of the fiduciary rule’s implementation. This is generally a positive development, says Roper: “The product innovation in response to the rule is one of the most significant benefits."
Newly launched annuities, for instance, offer shorter surrender periods (the waiting period before investors can withdraw funds) and lower embedded costs than their predecessors, she says.
Your advisor may also pitch you new fund classes (such as so-called "clean shares") that do away with expensive commissions. Fund companies have reshaped their offerings to get rid of a lot of the conflicts of interest that were embedded in older advisor-sold fund classes.
You Shouldn't Be Too Quick to Sign Anything
The rule won't actually bar commission-based products. In fact, a carve-out that is slated to go into effect next January will allow advisors sell you certain specialized products using a commission structure—even if there’s a conflict of interest. The provision, called the “Best Interest Contract Exemption” (or BICE) requires that advisors disclose their conflicts and you'll need to sign a contract acknowledging that you've received and understood the disclosure.
In all likelihood, these contracts will be long (some of the early ones were 72 pages long) and full of legalese and industry jargon. Not sure what you're reading? Decline to sign, or get outside legal advice before you do.
You Still Need to Ask Some Hard Questions
Even with some new investor protections in place—and more due soon, unless the Labor Department changes course—you still need to shoulder a lot of responsibility for tracking the ways your money is handled.
While the new rule will require all advisors providing advice on retirement accounts to act as fiduciaries, the rule only applies to retirement accounts, reiterates Michael Kitces, director of wealth management at Pinnacle Advisory Group. “It will still be crucial to ask advisors, ‘Does your advisory agreement require you to be a fiduciary for all of my investments, or just the money in my IRA?,’” he says.
Ask your advisor how he or she is getting paid to work with you—and how much their cut will be. “People should start asking hard questions—not just the ‘Are you a fiduciary?’ or ‘Do you have my best interest in mind?’ but ones like: '[I'm] looking at this bill, and I want to know what I’m paying to whom for what,'” Ellenbogen says.
Also watch how your advisor or the financial firm is communicating the changes coming your way. Many firms have already sent out notifications to clients. “If you haven’t heard anything, you may want to start asking why,” Wagner says. And monitor how your advisor is speaking about the rule and adapting to it. “If [he or she says] the changes are not good for you, it’s not necessarily a problem with the rule—it may be a problem with the advisor or the firm,” says Roper.
You May Want to Make a Change
If you are sensing issues—if you're not happy with your new fee-for-service arrangement, for instance, or you're asking any of the preceding questions and getting fuzzy answers—it may be time to leave your advisor. “If you don’t understand something, ask your advisor to explain it. If he or she can’t or won’t, then that speaks volumes,” Wagner says.
If you are interested in finding a new advisor, check out groups like the Financial Planning Association or the Garrett Planning Network. Both organizations consist of financial planners who already act as fiduciaries and charge a transparent fee for their services.
And because no association or designation is a fail safe, do some background research as well by looking up an advisor's record on BrokerCheck before you commit.