What the DOL's Fiduciary Rule Means for Consumers
The new regulations may cause some advisers to leave the game or raise their costs.
When the Department of Labor announced the revamped version of its fiduciary rule back in April, all kinds of talking heads—analysts, attorneys and, of course, politicians—were ready to chime in on its pros and cons. There's been a lot of chatter, but not a lot of answers.
The financial advisers affected by the so-called Conflict of Interest Rule still have plenty of questions and concerns regarding the new regulations and how they'll affect our industry. I'm with them. We need clarification on the timeline, terminology, liability and more.
And, just as importantly, so do our clients. After all, this is supposed to be all about the consumers, but nobody is talking to them.
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Every insurance company, every finance company, every broker, agent, adviser and representative that I've talked to is freaking out about this rule, which basically states that it doesn't matter what you call yourself, you must act as a fiduciary. But when we go to the clients, they say, "I guess this fiduciary standard makes sense—so why aren't we already on it?" or "Yeah, we've heard something about this, but we really don't know how it applies."
Here are three reasons the fiduciary rule is important from the consumer's perspective:
At its core, the rule is designed to protect consumers receiving investment advice inside of qualified retirement plans and individual retirement accounts (IRAs). And that's a good thing. We need some reforms. Investors need to know the difference between the fiduciary standard (advice provided in the best interest of the client, including the disclosure of possible conflicts of interest) and the suitability standard (advice is based primarily upon the financial objectives, income level and age of the client).
The average consumer probably doesn't know that the testing, licensing and oversight in the insurance and investment worlds are quite different. The standards for advisers and brokers are different. The ways these professionals get paid are different. If these changes actually bring some clarity, that's a positive. As an investor, you really should know who you're working with and get an eye for their integrity.
But, as in all things, you have to be careful what you wish for. Many in the industry won't want to go through additional training or risk a potential lawsuit as we work our way through what "best interest" means. I think we're going to have a shortfall of good advisers when many decide to retire rather than change their way of doing things. Consumers may lose representatives they trust.
There's going to be a learning curve for people as they find out what they're paying for and how much they're really paying for it. Some will struggle with the fee-based model or the assets under management model versus the world of mutual funds and hidden fees. Not knowing or ignoring the costs may have been more palatable for those folks.
Every consumer wants the best advice, but they may not have been considering what it costs to have it. If the expense of putting everybody on a level playing field regarding fiduciary responsibility raises the cost of getting advice—or if companies decide to deal only with big money investors—some new or timid investors, and possibly lower- and middle-income workers, may be priced out of the game. The rule's aim is protection, but for these consumers, it could result in limited access to professional guidance and investment products. Though DOL Secretary Thomas Perez told reporters in 2015 that "the rule is intended to provide guardrails but not straitjackets," others have called it Obamacare for retirement planning—good in theory but an unrealistic business model.
There's also the chance that lawyers watching the process will get a little litigation-happy, using the term "best interest" as an excuse to accuse advisers of wrongdoing when an investment doesn't work out over a period of years or if there's a market correction. This, too, could add to expenses that would be passed down to the client.
The fiduciary rule will begin to take effect by April 2017, with full implementation due in January 2018. The timeframe was meant to give companies plenty of room to prepare, but it also provides the opportunity for court challenges. And when the new administration takes over, things could change again.
There's so much that's unknown right now. There's no "checklist" for compliance, so everybody is struggling and making assumptions. Some companies are aiming for a higher standard than the government wants or expects. Others aren't doing anything, saying there's too much oversight, too much scrutiny.
The wise consumer will keep track of any updates and how they might affect his or her portfolio.
Alan E. Becker is founder, president and chief executive officer of Retirement Solutions Group and RSG Investments. A U.S. Navy veteran, Becker has passed the Series 65 securities exam and holds insurance licenses in multiple states. He has been in the planning industry for 18 years.
Kim Franke-Folstad contributed to this article.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Alan E. Becker is founder, president and chief executive officer of Retirement Solutions Group and RSG Investments, where he assists retirees and pre-retirees in the creation of retirement strategies. These strategies may include the use of insurance and investment products. He is the author of "Return on Investment or Reliability of Income? The True Meaning of ROI in the Golden Years." He is also the host of "Retire Right Radio with Alan Becker." Becker maintains a Series 65 securities qualification as well as insurance licenses in multiple states.
Inflation Causes Drivers to Switch Car Insurance Carriers
In a recent survey, 57% of drivers claimed their car insurance rate went up in the last 12 months, causing them to switch insurance carriers.
By Erin Bendig • Published
Combat a Possible Recession with Digital Fractional Real Estate Investing
Sponsored Find out how it revolutionizes your path to building passive income.
By Sponsored Content from Ark7 • Published
It’s Not Too Late to Save for Retirement: Five Ways to Step It Up
You’re not alone if you feel like time is running out for you to save, but taking advantage of workplace benefits, increasing the percentage of what you save and more can help.
By Kelly LaVigne, J.D. • Published
How Two Tax Laws Make REITs More Tax-Friendly
Taking advantage of the return of capital (ROC) and Tax Cuts and Jobs Act rate reductions can significantly reduce the taxes on REIT distributions.
By Michael Aloi, CFP® • Published
We Don’t Have to Let AI Win
Just as companies and employees evolved with tech advances in the past, we can do that again with AI, but employers need to focus on preparing their workforces to keep up.
By Neale Godfrey, Financial Literacy Expert • Published
Five Ways to Get Key Employees to Ride Out Big Changes
Business transitions can be difficult on workers, but company owners can take steps to incentivize key employees to stick around during times of change.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® • Published
Are You Overlooking Your Most Valuable Retirement Asset?
Selling your home and relocating could become a bigger part of the retirement conversation, given how real estate markets have boomed over the last decade.
By Julie Virta, CFP®, CFA, CTFA • Published
Insuring Your Plan for Retirement Income
‘Longevity insurance’ ensures you don’t run out of money in retirement. How to figure out how much you need, the types of annuities to use and when the income should kick in are tricky questions, though.
By Jerry Golden, Investment Adviser Representative • Published
Pros and Cons of Fixed Index Annuities as Retirement Tools
With so many FIA products available, each with its own contract terms and varying rates, it's crucial to invest in one that fits your retirement plan.
By Cliff Ambrose • Published
Which Retirement Accounts Should You Withdraw From First?
Here’s a standard order for when you should tap which account when you’re in retirement.
By Evan T. Beach, CFP®, AWMA® • Published