The long-running game of “will it, will it not” is over: The fiduciary rule is now live.
The initial rollout of the rule, which was designed under the Obama administration to protect retirement investors from unnecessarily high costs and conflicts of interest in the financial advice industry, was delayed in April after President Trump asked the Department of Labor to reevaluate the rule.
That review is expected to continue through Jan. 1 of next year, the rule’s final implementation date, and many in the industry are braced for changes. But Labor Secretary Alexander Acosta announced in a May 22 Wall Street Journal op-ed that large portions of the rule would take effect June 9.
Here are three reasons retirement investors should care about this rule.
1. Your advisor will now have to act in your best interest
This is, in part, the definition of a fiduciary: someone who puts your best interest ahead of his or her own.
You might think your advisor was already doing this, and in many cases, you’d be right. Many advisors put client best interests above their own as a matter of course. But under the fiduciary rule, it will be a matter of law. Formerly held to only a suitability standard, advisors who provide advice to retirement savers will now be required to be fiduciaries.
The difference is notable. Under a suitability standard, advisors can recommend the investment that pays them or their firm the highest commission, as long as it is suitable for your needs. Under a fiduciary standard, the advisor focuses solely on what’s best for you, which can lead to lower costs and better products.
The fiduciary rule applies only to advice involving investments in retirement accounts, such as individual retirement accounts.
2. It will bring transparency to fees
The Economic Policy Institute estimates that delaying the fiduciary rule just 60 days would cost retirement savers $3.7 billion over the next 30 years. Conflicted advice often means lower returns and higher fees for investors, according to a report by the Council of Economic Advisers under President Obama.
While the rule continues to be evaluated, financial firms and advisors have to comply with impartial conduct standards, which cover the best interest provisions above and limit advisors to “reasonable compensation.”
The rule also prevents advisors and firms from making misleading statements about transactions, compensation and conflicts of interest. If you work with an advisor, you’ll see more disclosures and paperwork outlining fees and commissions.
The rule could push high-fee, low-performance investments out of retirement accounts, particularly rollover individual retirement accounts, which are typically a breeding ground for the sale of these products.
3. It’s no substitute for vigilance
The fiduciary rule’s final fate is still uncertain. In the meantime, it provides a layer of consumer protection that wasn’t previously available to investors. But it doesn’t eliminate the need to do due diligence where your money is concerned.
Even in its final form, the fiduciary rule won’t apply to nonretirement assets, like taxable brokerage accounts. It doesn’t have a significant impact on IRAs you manage yourself, as the rule mostly deals with advice. In either situation, you’re still responsible for policing fees and, in the case of managed nonretirement accounts, ensuring your advisor is acting in your best interest.
Where the fiduciary rule does apply, it doesn’t suggest that every fiduciary advisor is a good financial advisor or the right financial advisor for you. It also doesn’t eliminate commissions or proprietary products, like mutual funds offered by a financial firm and recommended by that firm’s advisors. Both could be addressed more directly with a provision called the best interest contract exemption, which isn’t scheduled to take effect until Jan. 1. The exemption has been central to the controversy over the rule and is expected to be the focus of scrutiny over the next seven months.
That means in many ways, investors should continue business as usual: Carefully vet anyone who manages your money, which includes asking if a financial advisor acts as a fiduciary. Be sure that you and your advisor align on investment philosophy and that the advisor understands your goals. And always be clear on the fees you’re paying, both to that advisor and for your investments.