Fiduciary Rule Under Fire
Many investor-friendly changes by financial firms are now in place, but investors need to step it up when it comes to educating themselves.
For retirement savers, a new era of clarity was supposed to dawn in April. Instead, they've been left in the fog.
A U.S. Department of Labor rule that was set to take effect April 10 would have made all financial professionals offering advice on retirement accounts subject to a "fiduciary" duty to act in their clients' best interests. But following a February presidential memorandum directing the Labor Department to examine whether the rule could hurt investors' ability to access financial advice, Labor proposed delaying the rule until June 9. At that point, the rule could be delayed further, or it could be watered down or revoked entirely.
First, the good news: Many investor-friendly changes made by financial firms in anticipation of the rule can't easily be undone, even if the rule unravels. And perhaps more importantly, "consumer interest in and awareness of fiduciary duty has gone up as a result of the debate over the rule," says Barbara Roper, director of investor protection at the Consumer Federation of America. That horse isn't going back in the barn.
Now for the bad news: If there's no fiduciary rule, a heavy burden remains on investors to probe the conflicts of interest that could color the retirement advice they get from financial professionals. But you can maximize your odds of getting solid advice if you ask how your adviser is paid and why he might recommend one investment over another—and perhaps create your own fiduciary rule by dumping advisers who don’t commit to putting your interests first.
The fiduciary-rule debate has opened the eyes of investors who didn't realize that many financial professionals are under no obligation to act in their clients' best interests. Brokers, also known as registered representatives, are generally not required to put clients' interests first. Instead, they must make recommendations that are "suitable" for clients. That might mean recommending a mutual fund that fits your risk tolerance and investment goals but charges higher fees that put more money in the adviser's pocket, ignoring lower-cost alternatives. Investment advisers, however, are held to a fiduciary standard and required to disclose potential conflicts of interest.
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In advance of the rule's implementation, some brokerage firms publicized changes in how their brokers are paid, in some cases saying they'd eliminate commission-based IRAs in favor of fee-based accounts. (Although the fiduciary rule doesn't bar brokers from earning commissions, it does require firms to adopt policies to mitigate the resulting conflicts of interest and to disclose potential conflicts to investors.)
Some of those changes seem likely to stick, even if the rule doesn't. Merrill Lynch has been vocal about its plans to shift away from commission-based retirement accounts. Morgan Stanley has said that it will continue to offer both commission-based and fee-based retirement accounts but will make other changes, such as cutting stock commissions and reducing potential conflicts of interest with outside managers. In a January memo to staff, the firm's wealth management executives said that "regardless of any potential delay, we will continue to move ahead" with such changes.
Cheaper Share Classes Born
The fiduciary rule has also spawned new mutual fund share classes that will help fund investors compare costs and save money. "That is going to be a permanent change," says Mercer Bullard, law professor at the University of Mississippi School of Law and founder of shareholder advocacy group Fund Democracy.
American Funds, for example, has introduced "clean shares," which charge fund management and administrative fees but nothing for the broker who sells the fund. The broker can add his own commission on top of the fund charges. That's a big change from how broker-sold funds are typically priced today. Funds sold through brokers generally compensate brokers by charging investors a sales charge, or load. And those loads can vary among fund firms and fund categories—perhaps giving a broker an incentive to recommend a stock fund, for example, over a bond fund. Clean shares make it easier for investors to understand how much they're paying for fund management and how much their broker is getting for selling the fund.
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A number of other fund firms, meanwhile, have filed to launch "T shares." Unlike traditional A shares, the new T shares carry a maximum 2.5% up-front sales charge, regardless of the fund category—stock, bond or blend. That's less than half the load charged by many stock fund A shares, making T shares the most cost-effective choice for most investors buying funds through a commission-based broker, says Todd Rosenbluth, director of ETF and mutual fund research at investment-research firm CFRA.
But if there's no fiduciary rule, will brokers recommend these new share classes? That may depend on whether their clients are well informed. It's like getting a prescription from your doctor, Rosenbluth says: You could save a lot of money by getting a generic drug, but you might have to ask for it.
If you're looking for a new adviser, seek out one who will act in your best interests regardless of what happens to the rule. You can find registered investment advisers, who are already held to a fiduciary standard, at www.adviserinfo.sec.gov. Look at the adviser's Form ADV, which discloses any regulatory problems as well as services and fees. Some professional groups, including the National Association of Personal Financial Advisors and the Certified Financial Planner Board of Standards, impose their own requirements on members to put clients' interests first.
Even if the fiduciary rule were to go into full effect, it would be no panacea. It doesn't apply to non-retirement accounts, and many investor advocates believe it doesn't go far enough.
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If you'd like your adviser to make a more straightforward commitment to act in your best interests, you can ask him to sign a fiduciary oath. The Committee for the Fiduciary Standard, a group of investment professionals and fiduciary experts, has drafted an oath that you can download. Harold Evensky, a member of the committee's steering group and chairman of fee-only advisory firm Evensky & Katz/Foldes Financial, sees the oath as a way to drive the fiduciary standard forward, even in the absence of a government-imposed fiduciary rule. "If individuals start going into firms, and their adviser says they can't sign it," he says, "that will start a huge storm."