After several years of lobbying and debate, the Department of Labor’s fiduciary rule — which requires financial professionals to act in the best interests of their clients — hit yet another snag.
On Feb. 3, President Trump directed the DOL to undertake an “updated economic and legal analysis of the rule, including analyzing potential harm to investors, disruptions within the retirement services industry, price increases to investors and increased litigation.”
The rule was scheduled to go into effect April 10, but the DOL announced in early March a proposed 60-day extension until June 9. And it’s even possible the regulation will be rescinded.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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.
Regardless of the timeline or the results of the required analysis, the industry is already changing. And, unfortunately, it may not be for the better.
Many investors are surprised to find out that all advisers are not fiduciaries.
Different Standards for Different Professionals
Brokers who solely sell mutual funds are held to a “suitability standard,” which simply requires that investments must fit clients’ investing objectives, time horizon and experience. Insurance-only professionals, financial professionals who are only licensed to sell life insurance and annuity products, not securities, are also held to the suitability standard.
An adviser under the fiduciary standard, when faced with two identical products, would be compelled to recommend the product that is best for the client, even if it meant fewer dollars in his or her own pocket.
The Department of Labor rule would require all financial professionals to act as fiduciaries when helping investors with qualified retirement accounts, which are accounts where money is invested on a pretax basis. Those would include 401(k)s, 403(b)s and IRAs. That all sounds great, but where there’s a will, there’s a way to get around it.
Firms Find Ways to Comply But Pile on Fees Elsewhere
Some firms are adapting to the rule as it is written, but that doesn’t mean investors are going to benefit.
These firms have created new classes of mutual fund shares to be used in IRAs (where the rule says they must disclose fees). They are simultaneously loading the non-qualified parts of their clients’ account portfolios — those funded with after-tax money, such as mutual funds and variable annuities — with high-fee and high-cost investment vehicles, because those accounts aren’t covered by the fiduciary rule.
A Disturbing Example
I recently interviewed a prospective client whose IRA was changed to include some individual shares of stock and some no-load mutual funds. Keep in mind the entire IRA was now a “wrap account,” with everything inside subjected to an annual fee, but the investor was paying twice for the mutual funds; there still are expenses, just not a front-end load.
But the worst part of this portfolio was the non-qualified holdings. The entire after-tax account was put into a variable annuity, with mutual fund expenses, life insurance expenses and additional rider expenses. When you combined the fee-based IRA, the mutual fund expenses, and the variable annuity expenses, this client was paying more than 2% annually for the entire portfolio — and the only expense that was disclosed was the wrap account fee.
Some firms have announced they will lower the minimums required for variable annuities held in non-qualified accounts. This is an attempt to put as much of the assets under management into the highest expense vehicle possible.
I’ve also seen portfolios with low-cost mutual fund classes in IRA accounts, and then C Shares in non-qualified accounts. C-class shares typically have higher expense ratios than A- or B-class shares. So, it’s pretty obvious that these “advisers” are complying with the intent of the DOL’s version of the fiduciary rule when required to do so, and doing the exact opposite inside the non-qualified accounts. Because, frankly, they can.
A Quagmire For Investors Going Forward
The idea behind the fiduciary rule is clear: Financial professionals are to act in the best interest of the client and to disclose all fees and conflicts of interest. If everyone acted in this manner for all types of assets (retirement and non-retirement), the individual investor would benefit.
But it’s apparent from firms’ actions that investors could actually be worse off going forward with more complicated portfolios, more hidden expenses and less transparency than ever.
How to Protect Yourself
That’s why investors should always ask for a clear and concise explanation of fees and expenses.
If the portfolio is going to be in the stock market, ask about the management fees. Ask about trading costs. Ask about any additional expenses found in mutual funds (up-front load, deferred load, quarterly expenses, etc.) on top of the management fee.
One of my favorite questions to ask today is why investments inside of an IRA are being changed now. If your financial professional needs to overhaul your IRA due to the fiduciary rule, he may not have been looking out for your best interests in the past.
If the portfolio is going to include annuities, ask about life insurance cost (called mortality and risk expense). Ask about additional rider fees. Ask about “sub account” expenses (for the mutual funds found inside variable annuities).
The bottom line is, individual investors should remain vigilant regardless of the regulatory environment. There are plenty of advisers out there who have been fiduciaries for their entire careers. That may be a great place to start if you are interviewing for a new financial professional.
Securities offered through Kalos Capital, Inc., and Investment Advisory Services offered through Kalos Management, Inc., both at 11525 Park Woods Circle, Alpharetta, Georgia 30005, (678) 356-1100.Verus Capital Management is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.
This material is educational in nature and should not be deemed as a solicitation of any specific product or service. All investments involve risk and a potential loss of principal. Neither Kalos Capital nor Kalos Management offers tax and legal advice. Please consult with a tax adviser or attorney for advice regarding the impact on your portfolio.
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.
-
The Most Popular Apps for Retirement Planning in 2025A J.D. Power survey ranks retirement planning apps based on customer service and satisfaction. Does your financial app make the cut?
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary FormsStandard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary Forms
Standard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
This Is How Life Insurance Can Fund Your Dreams NowBeyond a death benefit, life insurance can provide significant financial value and flexibility through 'living benefits' while you are still alive, helping with expenses like education, business ventures or retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for RetirementSaving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial ExpertHealth care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest RatesAs speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial ProfessionalWinning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
