What the New Fiduciary Rule Means for Retirement Investors

Advisors, Investing, IRA, Retirement Planning
Image of mature man holding papers and talking on phone while sitting at home with a laptop in front

You know who has your financial best interests at heart? OK, so “Wall Street” probably wasn’t your first guess.

But that could start changing this week, thanks to a long-awaited rule from the Labor Department. Introduced by the Obama administration and delayed under President Donald Trump, major components of the fiduciary rule will finally take effect Friday. The new regulations state that advisors who have their hands in your retirement accounts must act as fiduciaries, which means they’re required to put your best interest ahead of their own.

The rule is still under review, and could undergo changes before the full implementation deadline of Jan. 1, 2018. But the portions slated to take effect this week could have a significant impact on your retirement accounts. What does it all mean for you — the consumer, investor, IRA saver, 401(k) contributor? Here’s our guide to walk you through the new rule.

What’s this thing all about, anyway?

This fiduciary rule requires financial advisors and brokers who provide advice for retirement accounts to act in the best interest of their clients.

This is the kind of rule that you would hope wouldn’t be needed — kind of like not driving at highway speeds with a kid on the fender of your car — but, well, it is.

As we said, there are plenty of good advisors who already follow this rule. But there are also plenty who don’t, and this is the Labor Department’s attempt to protect investors from those bad apples. (For light reading, here are all the details on the fiduciary standard rule — aka the Conflict of Interest Rule.)

What’s a fiduciary?

Fiduciary is a fancy term for advisors who don’t put their own profits over the needs of clients. If you’re a fiduciary, you’re held to a fiduciary standard, which means the same thing.

Under this rule, advisors and brokers who provide investment advice for retirement accounts must now be fiduciaries. (Here’s a good rundown on what financial titles mean.) They must adhere to impartial conduct standards, which limit advisors to “reasonable compensation” and prohibit misleading statements about that compensation, as well as transactions and any conflicts of interest. 

What problem is this new rule addressing?

Currently, many advisors and brokers are subject only to a “suitability standard”: If an investment is deemed a good fit for your needs, an advisor can put you in it.

As you might imagine, there are plenty of investments that might be loosely defined as a “good fit.” Unscrupulous brokers could choose the ones that would line their pockets with the highest commission. No more, under the new regulations.

When does it take effect?

Many of the basic regulations go into effect on June 9, 2017; others won’t be implemented until Jan. 1, 2018. The rule is under review, as directed by President Trump, and consumer advocates warn that it could undergo substantial changes.

What’s considered a ‘retirement account’ under this rule?

Traditional and Roth IRAs, 401(k)s and — this is a surprise — some health savings accounts.

Are you saying that I’ve been getting questionable investment advice?

While we haven’t met the financial pros on your payroll, we can say that the system in which they operate has long favored those giving the advice over those receiving it.

When an advisor’s take-home pay is tied to bonuses and commissions — and those rewards are based on selling products that make the company more money — salesmanship, not stewardship, is rewarded.

That said, not everyone in the industry is just looking out for No. 1. And the U.S. Securities and Exchange Commission’s “suitability standard” has hopefully cut down on the number of 90-year-olds put in high-risk, small-cap mutual funds. But binding an advisor to recommend products that are “suitable” is a pretty low bar and doesn’t exactly scream “customer first.”

After all, a broadly diversified mutual fund with a 1.2% sales charge may be perfectly suitable for a particular client. But isn’t a mutual fund that has the same investment objective and risk profile with a 0.2% expense ratio more suitable? That’s the conflict that the new fiduciary rule seeks to clear up.

What are the exceptions?

The new rule says that a fiduciary cannot accept payments that create conflicts of interest. Fine. But the Labor Department has offered an exception that many brokers are likely to latch on to: Firms can continue to accept the types of compensation they do now (notably commissions and revenue shares) as long as they commit to a “best interest contract” exemption, called a BICE.

The BICE portion of the rule won’t go into effect this week and is likely to be the focus of the current review. The exemption still requires firms and advisors to act in a client’s best interest and that they disclose on their websites what amounts to every detail of how they are paid.

And the rule says education doesn’t constitute advice, unless a specific recommendation is made. There was some concern that advisors would have to push a paper across the table to be signed before even talking to a prospective client; that’s not so.

This sounds great! Why would anyone oppose this?

How much time do you have? The Labor Department received 3,134 comments over a five-month period about this rule. You’d probably oppose it if you were an advisor who’s been making a pretty good living off “suitable” investments.

But is there a downside for consumers?

You know how airlines tend to tack on fees? Sometimes costs get passed along to the little guy. That means some advisors will probably raise their fees to account for money lost due to the regulation.

Even if you don’t work with an advisor now, there’s a chance you might want to work with one in the future. Assuming you haven’t swiftly accumulated millions between now and then, the rule may make that harder. As more advisors shift toward a fee-based compensation program, there is concern that they won’t want to deal with small accounts.

On the other hand, it could save retirement investors money, says Kyle Ramsay, NerdWallet’s investing manager. “This ruling should better align the interests of investors with those providing advice, which would potentially result in better returns and lower fees,” he says.

I don’t have an advisor, so I won’t be affected, right?

You still might see more paperwork. For example, part of the regulation is an attempt to protect investors as they roll a 401(k) into an IRA when leaving a job. Brokers may not be able to suggest you do that without first having you sign a BICE.

Ultimately, who’s the ‘winner’ with this rule?

Consumers, of course. And some advisors, too. Within the investment industry, advisors who are already fiduciaries are pretty happy with this rule. That includes human advisors, but also some independent robo-advisors — companies that use computers to manage client investment portfolios.

“Online advisors like Betterment and Wealthfront will be attractive options for investors, as automation and software enable them to help smaller accounts with less overhead and thus lower fees,” Ramsay says. “They are regulated by the SEC and many abide by the fiduciary standard.”

Bottom line: No one has your best interests at heart more than you. So no matter the rules passed, forms signed or oaths taken, it’s on you to do your due diligence — checking up on a financial firm or advisor’s track record and credentials — before entrusting them with your money.

Arielle O’Shea and Dayana Yochim are staff writers at NerdWallet, a personal finance website. Follow them on Twitter: @arioshea and @DayanaYochim.

Updated June 8, 2017.