The Labor Department’s tougher standards to protect retirement investors from salespeople peddling complex, expensive financial products raises an obvious question: Why not extend that rule to all investors instead of just those saving for retirement?
The recently adopted fiduciary rule, as the Labor Department’s rule is known, requires all financial professionals working with retirement accounts to disclose all fees and costs and put the best interests of their clients first. The rule is intended to prevent advisors from pushing products that they have a vested financial interest in but may not be the best choice for their clients. Before the rule, only registered investment advisors were held to a fiduciary standard, but not all financial advisors are RIAs.
[See: 8 Things Not to Hide From Your Investment Professional.]
For proponents of the fiduciary standard, the question is why after-tax accounts that hold stock or bond mutual funds or exchange-traded funds shouldn’t also be getting the same fiduciary consideration as pre-tax retirement accounts, says John Kageleiry, owner of Verium Planning and Asset Management in Dover, New Hampshire. “Which accounts wouldn’t benefit from this?” he says.
The Securities and Exchange Commission seems to have taken that question to heart. The SEC is considering adopting its own fiduciary rule and recently solicited public comments on standards of conduct for advisors and broker-dealers. Any move by the regulator to adopt tougher standards could be years away, and even the Labor Department’s rule may take longer to be enforced. The rule took effect in June, with enforcement scheduled to occur after Jan. 1, but earlier this month, the Labor Department proposed an extension until July 1, 2019, in response to the Trump administration’s request to review the Obama era rule. Industry critics say the rule is complicated and will be expensive to comply with.
Still, the Labor Department’s rule clearly has opened the door to extending tougher standards to all investment accounts, and one state isn’t waiting for the SEC to act. That had us considering what a broader adoption of the rule might mean for investors.
The winds of change. If the SEC adopted a fiduciary rule, Kageleiry thinks it would lower costs for investors as the use of commissions would be curbed and advisors would no longer push more-expensive investments if cheaper options were available.
But a potential drawback of this shift toward fee-based financial guidance is that investors with smaller account balances may have a harder time getting investment advice. Advisors charging a flat fee based on total assets would be more inclined to go after larger accounts, says Eric Aanes, president of Titus Wealth Management in Larkspur, California.
Because the SEC has yet to propose its own rule, it’s unclear how stringent it might be. “What action they will take remains uncertain,” says Barbara Van Zomeren, a senior vice president at Ascensus, a retirement, education and health care savings services provider in Dresher, Pennsylvania.
The SEC’s version probably would rely more heavily on disclosing high fees than prohibit excessive compensation outright, and would be more friendly to the industry than the Labor Department’s rule, says Duane Thompson, a senior policy analyst at Fi360, a fiduciary education, training and technology company headquartered in Pittsburgh.
[See: 7 Ways to Pay Less for Your Investments.]
There is also the question of how the final Labor Department rule will look, says Thompson. The definition of a fiduciary could be narrowed, or the rule could be rescinded, he says. With Republicans controlling Congress and the Trump administration favoring less regulation in general, the Labor Department could face pressure to water down the fiduciary rule.
Concerned that the fiduciary rule might be weakened, Nevada passed a law that goes further than the Labor Department’s because it applies to all investment accounts. The law, which took effect last month, requires brokers and investment advisors to abide by the state’s fiduciary standard and disclose commissions, but Nevada’s fiduciary standard falls short of mandating that those professionals act in the client’s best interests.
What you should be asking. While the battle over adopting tougher standards for all accounts plays out, investors should take matters into their own hands and protect themselves by asking their financial advisors tough questions.
The key question consumers should ask is if the advisor will act as a fiduciary on all their accounts. Ask if they are legally required to act in your best interest, Thompson says. “See if they give you a clear yes or no.” If yes, investors should get that pledge in writing by having an advisor sign a fiduciary agreement or produce an existing agreement that shows the advisor is already required to act as a fiduciary, Kageleiry says.
Additionally, investors should ask for a detailed list of all management fees as well as the expenses of the funds the advisor has them invested in, Kageleiry says. The goal is to make sure an advisor isn’t getting paid from fund fees in the portfolio in addition to the compensation for managing it, Kageleiry says.
But most people are too afraid to ask these questions. “People feel beholden to these advisors,” Kageleiry says. “They don’t want to rock the boat.”
[See: 10 Questions to Ask Before You Hire a Financial Advisor.]
Van Zomeren also recommends asking advisors why they think you should do business with them and, if applicable, when and why their business model uses a suitability standard instead of a fiduciary one. Under the weaker suitability standard, broker-dealers aren’t legally required to put a client’s interest first but must only make recommendations appropriate for the client’s financial circumstances.
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Will the Fiduciary Rule Be Contagious? originally appeared on usnews.com
