When it comes to their retirement plans, what investors don't know definitely can hurt them—a lot.
That's why the U.S. Department of Labor thought it was necessary to step in recently with new rules that will require all financial professionals to adhere to the fiduciary standard when they're doling out recommendations to their clients about how to handle their qualified retirement plans and individual retirement accounts.
These new rules are being phased in and won't be in effect completely until January 1, 2018. But they could help investors make better decisions when choosing their financial professionals from the onset simply by bringing the subject to everyone's attention.
After all, even if the DOL had taken no action, even if the issue had never found its way into the news, people should know whether their adviser is a fiduciary.
Of course, first they need to know what a fiduciary is.
Many people have no clue, a fact illustrated recently when Tony Robbins, the renowned personal-finance instructor and self-help author, decided to conduct one of those person-on-the-street interviews to find out how much, or how little, people know about their retirement investments.
He asked people he found walking on Wall Street—Wall Street, mind you—what a fiduciary is. No one knew the answer.
Well, actually, one person knew. He was a fiduciary!
The people Tony Robbins stopped to chat with also didn't know what kind of fees they were paying to have someone manage their 401(k) or other retirement accounts. Robbins was kind enough to point out that the folks he encountered aren't that atypical, and in fact the majority of people in America think they pay no fees at all. They are sadly mistaken because not only do they pay fees, but over time, because of compound interest, they can end up paying a significant chunk of money.
Clearly, the American public is in need of some financial education, and if the DOL's fiduciary ruling does nothing else, it may serve as a great awakening for investors who will start asking questions about how much they are paying for their investments to be managed and whose interests are really being served.
And that's a good thing.
So first things first: A fiduciary is a financial professional who is required by law to put the interests of clients ahead of his or her own interests.
Not all advisers do that. Many financial professionals are essentially selling products and are paid a commission. Think of it like buying a car. The car salesman might give you worthwhile advice on how to maintain the car to keep it running efficiently, but that's all secondary to the transaction. That car salesman is paid to convince you to buy the car, not to look out for your best interests.
In the world of investments, here's how that often plays out. Let's say an adviser has three funds he or she could recommend to you. But, unbeknownst to you, the adviser stands to collect a higher commission if you go with fund A instead of funds B or C. Fund C might be the best deal for you, but it's in the best interest of the adviser to sway you to go with fund A.
By law, a fiduciary can't do that. The fiduciary must always recommend what is in the client's best interest. Instead of a sales commission, fiduciaries are paid a fee that is linked to the value of the client's portfolio. The better the portfolio performs, the better the fiduciary is paid.
So be sure that any financial professionals you choose to work with take a fiduciary oath and know that they are putting your best interest first.
As more people learn about fiduciaries—and hopefully do a better job of answering the questions the next time Tony Robbins strolls down Wall Street with a camera—the more informed about their investment decisions will become.
Reid Abedeen is a partner at Safeguard Investment Advisory Group, LLC (opens in new tab). As an Investment Advisor Representative and Insurance Professional (California license #0C78700), he has helped retirees with their financial issues for nearly two decades.
Ronnie Blair contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Reid Abedeen is the managing partner at Safeguard Investment Advisory Group, LLC (opens in new tab). He holds California Life-Only and Accident and Health licenses (#0C78700), has passed the Series 65 exam and is an Investment Adviser Representative registered through the Financial Industry Regulatory Authority.
Target, Starbucks Team Up for Curbside Pickup
Drive to Target, pick up your stuff — and get coffee without leaving the car. Prefer to stay home altogether? Buy into an offer of free home delivery from Target for a year.
By Bob Niedt • Published
Heat Pumps vs Solar Panels: Which Give More Energy Savings?
Whether you choose heat pump or solar panels, it just got easier to save on energy bills.
By Ben Demers • Published
2 Ways Retirees Can Defuse a Tax Bomb (It’s Not Too Late!)
If you’re retired and find yourself sitting on a “tax bomb,” you may think there’s nothing you can do. But two strategies could seriously reduce your taxes in retirement.
By David McClellan • Published
5 Trends in High-Net-Worth Philanthropy
Wealthy families and organizations are giving more to charity but also targeting funding to fewer grants in their efforts to create bigger impacts.
By Hannah Shaw Grove • Published
6 Ways a DAF Can Make Your Year-End Giving Better Than Ever
Giving appreciated assets instead of cash could be the most tax-smart move you can make with a donor-advised fund, but wait, there's more…
By Stephen Kump • Published
Life Insurance Strategies to Consider When You Own a Family Business
Not only can life insurance replace lost income, but it can help with estate taxes and provide a sense of fairness for family members who don’t participate in the business.
By Howard Sharfman • Published
Short-Term Investments to Protect Against Inflation and Market Volatility
Rates on Series I savings bonds, T-bills and fixed annuities are all above historical averages and could serve investors well during turbulent times like these.
By Bradley Rosen • Published
What’s the Difference Between Average and Actual Rate of Return?
An average rate of return can mask losses over time, so what investors really want to keep an eye on is the actual rate of return.
By Carlos Dias Jr., Wealth Adviser • Published
Can You Build a Retirement Income Plan With Both Risk and Reliability?
Two strategies for making retirement savings last — probability-based income planning and guaranteed income planning — can help ensure you have what you need in your golden years, but which is right for you?
By Scott M. Dougan, RFC, Investment Adviser • Published
5 Financial Wellness Tips to Help Weather the Winter
You can regain some control over today’s money pressures by exploring your employer's financial support options and benefits, making plans to save and taking other simple actions.
By Aaron Harding, CFP® • Published