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Why the Fiduciary Rule Matters to You

Regulations governing financial advice don’t protect investors as much as you might think. Hiring a fee-only fiduciary advisor can help.
July 20, 2018
Advisors, Brokers, Financial Planning, Investing
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Here’s a PSA for you: Many financial advisors don’t have your best interests at heart, and with the demise of a regulation known as the fiduciary rule, that’s even more likely to be a problem.

It’s perfectly legal, and not uncommon, for some advisors to recommend one investment when there’s a similar one that’s cheaper — and thus better — for you. Here’s what to know and what to do about it.

What you should know

In 2016, the U.S. Department of Labor issued its fiduciary rule, which would have required any advisors who offer retirement advice to act in their clients’ best interest. But that fiduciary rule was challenged, overturned in court and appears to be dead.

So now we’re back to where we were before: Many people who call themselves “financial advisors” are regulated solely by a “suitability” standard. Generally, these are investment brokers, who are regulated by the Financial Industry Regulatory Authority, but insurance brokers can fall under this regulation as well.

The standard says their advice simply has to be suitable for your situation, even if the products they recommend are more expensive and less ideal than others.

They are permitted to sell you products that are overpriced and not of high quality.

Knut Rostad, president, Institute for the Fiduciary Standard

“They are permitted to sell you products that are overpriced and not of high quality,” says Knut Rostad, president of the Institute for the Fiduciary Standard.

The Institute advocates for the idea that advisors should be required to act as “fiduciaries,” which means acting first and foremost in their clients’ best interests.

Non-fiduciary advisors, such as some brokers and others, “are permitted to put their interests ahead of yours,” he says.

Why the fiduciary rule matters to you

Say you want to invest for retirement and visit a financial advisor at a big-name brokerage. The advisor may get a hefty payment for recommending particular mutual funds, for instance, rather than cheaper versions of the same thing.

“It doesn’t matter that your broker is a nice guy who you really trust,” says Betsey Stevenson, associate professor of public policy at the University of Michigan’s Ford School of Public Policy.

“He’s got to feed his kids,” she says. “That means if he doesn’t have to put your best interests first then, of course, he’s going to tip the scales at least a little bit to make sure he’s providing for himself and his family.”

Americans lose an estimated $17 billion a year due to conflicted investment advice.

If you’re investing for a long-term goal, even a small difference in cost can add up. As a member of the Council of Economic Advisers under President Obama, Stevenson contributed to a report that estimated Americans lose $17 billion a year as a result of overpaying on investment products that they buy based on conflicted advice.

» See how a 1% fee can cost you $590,000 over time

How to protect your money

Many financial advisors are required to abide by a fiduciary standard, but it’s up to you to find them.

If you’re a savvy investor who simply wants to place trades, you probably don’t need a fiduciary advisor. But if you’re looking for advice, then make sure you’re seeking it from someone who is working in your best interests.

Here are three tips:

Hire a fee-only financial advisor

Advisors who are paid solely by fees have far fewer conflicts of interest than fee-based advisors (fee-based means they receive a fee and commissions) and commission-only advisors. Here are three reasons to hire a fee-only planner.

Seek an advisor from professional groups

The National Association of Personal Financial Advisors, Garrett Planning Network, XY Planning Network and the Alliance of Comprehensive Planners all require their members to abide by a fiduciary standard in all their work with clients.

Consider a robo-advisor

If you’re simply looking for help getting started on some long-term investing goals, such as retirement, then computer-aided advice can be a smart, low-cost way to go about it. We round up our top picks for robo-advisors here.

Government fix? Maybe

The Labor Department’s fiduciary rule is dead, at least for now. Meanwhile, in April the Securities and Exchange Commission proposed its own fiduciary rule, which it’s calling Regulation Best Interest.

Some consumer advocates aren’t thrilled with it, however. Barbara Roper, director of investor protection at the Consumer Federation of America, a nonprofit advocacy group, says it could be a starting point but needs strengthening.

For example, rather than requiring brokers to avoid conflicts of interest, the proposed rule relies heavily on disclosures to alert investors to conflicts. But disclosures aren’t a great safeguard, Roper says: “Even if people read them, they don’t understand them. Even if they understand them, they then don’t know what to do with the information.”

Similarly, Rostad, of the Institute for the Fiduciary Standard, strongly opposes the SEC rule as currently written. “Investors would be better off with having no rule rather than the rule that is proposed,” he says, calling it “‘best interest’ in name only.”

Consumers should stay skeptical

It’s unclear at this point what a final SEC rule might look like — or even if the SEC will approve it as currently written.

Nobody is giving you financial advice for free.

Betsey Stevenson, associate professor of public policy, University of Michigan

That means consumers need to stay on guard. Don’t be afraid to ask directly whether an advisor follows a fiduciary standard.

If an advisor tells you there’s no charge for the advice they’re giving, start asking questions about commissions and other hidden forms of payment.

“Free” advice is a red flag that you may be paying more for a product than you need to, and those hidden fees will add up over time.

“Nobody,” Stevenson says, “is giving you financial advice for free.”

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