Obama Financial Planning Proposal Highlights Need for Investor Control

Investing
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 By Dmitriy Fomichenko

Learn more about Dmitriy on NerdWallet’s Ask an Advisor

President Obama last week proposed new rules to tighten regulations on financial advisors and brokers who deal with retirement accounts. The new rules aim to make advisors act in their clients’ best interest, according to a “fiduciary standard.”

We don’t know yet if the measures will be approved, or how effective they would be if they are. However, investors don’t have to wait for these new regulations to take more control of their financial planning.

The proposal was based on the argument that current rules allow room for advisors to take advantage of their clients. Instead of recommending the best investment products for their clients’ retirement portfolios, some advisors suggest products with the highest commissions, regardless of their performance. Also, right now there is no law to regulate the hidden fees of a retirement plan.

With secure pension plans a thing of the past for many Americans, more of them are focusing on their retirement accounts and taking a more active role — for example, with so-called self-directed retirement options.

Plans such as a self-directed IRA LLC or a Solo 401(k) give investors the opportunity to actively manage and invest their portfolio. With a self-directed IRA LLC, the custodian takes a passive role and invests all the funds in a special purpose LLC, which will then be directed by the plan owner. With a Solo 401(k) plan, there is no custodian required and, therefore, the plan owner can directly take over.

The providers and custodians of these retirement plans earn their profit by providing setup and plan maintenance services instead of selling investment products. This helps eliminate conflict of interest.

Many investors also choose self-directed retirement plans for the ability to invest in alternative assets, including real estate, private placements and precious metals. Since the account owners of a Solo 401(k) plan or self-directed IRA LLC are allowed to manage their own funds, they can find the best investment options to fit their goals and risk appetite.

The president’s fiduciary-standard proposal still needs to be finalized and approved, which could take a few months. We know that with the $11 trillion industry at stake, Wall Street will try to fight these new rules. Already, there have been arguments that the regulations, if implemented, will negatively affect the financial industry as well as investors.

If you have reason to be concerned that your financial advisor is putting his or her benefit ahead of yours, it’s time to take action. Search for a better financial advisor or plan custodian, or take matters in your own hands with a self-directed Solo 401(k) or IRA LLC.