Good Life

How does the DOL’s new fiduciary rule affect consumers?

June 9 marked a historic day — one that has been seven years in the making. As of midnight June 9, according to the Department of Labor’s fiduciary rule, anyone providing any advice or recommendation on a retirement account has a fiduciary responsibility to act in the best interest of their client(s).

Many consumers were puzzled, thinking, “weren’t they already?” While Investment Advisor Representatives hold to a fiduciary standard, registered representatives and insurance agents were following another guideline called “suitability,” meaning it may not be the best thing they can offer to the client, but is suitable for someone in their situation.

While there has been a lot written about the history of this new 1,000-page rule and the drama surrounding it — from delays to fierce opposition on certain sides of the financial industry — there has not been a lot said on what this means for consumers. As a professional in the financial industry, I would like to shed some light on how this new rule can affect you.

Impartial conduct standards of the fiduciary rule

The DOL considers a fiduciary based on the Impartial Conduct Standards, which requires “providing advice in the retirement investor’s best interest; charging no more than reasonable compensation, and avoiding misleading statements.” Most people would assume their adviser was already abiding by these three principals. And while I do not agree with the notion that most advisers follow predatory practices to hurt their client for financial gain, it is important for consumers to understand what is implied by these standards.

Advice in your best interest: To accomplish this effectively, the first thing your adviser should do is study their current investment strategy to decipher whether it can be improved. Your adviser should also thoroughly determine your goals, desires and risk tolerance to assess any changes necessary. But, of course, there must be justification if they make a change in investments.

The second aspect is to disclose all conflicts of interest, and if possible, avoid them altogether. For example, if your adviser were to receive a commission for a recommendation, that would be considered a conflict of interest. Since they stand to gain financially by your decision to purchase what they recommend, you should know whether that recommendation was motivated by the commission. The third requirement is for advisers not to even consider their compensation when making a recommendation, and for their supervisors to set procedures in place to monitor the advice given. This could mean that if the adviser does not believe that investing a client into their available product or portfolio is better than their current qualified account, then the adviser must recommend that the client stay put. It is very important for you to understand your adviser might only be able to offer what is available within the financial institution where they work and that in some circumstances they may not have an option that is better or in the best interest of their client available and would thus need to recommend staying put in the client’s current account.

Reasonable compensation: The DOL did not issue any specific dollar amounts advisers can charge. However, they prefer advisers not get paid more by their financial institution when they hit certain quotas or milestones. This incentive-like method might conflict too greatly with the first standard. It is important for you to know how your adviser gets paid and who pays them. Investment advisers have to disclose in writing what they receive as compensation (thanks to this rule). All advisers have to disclose their compensation — even if the compensation is a commission not paid by the client. There is also a common practice by broker dealers of paying huge sign-on bonuses to advisers in anticipation of all the revenue the new adviser will bring in to the company. That practice would not be compatible under the new rule since the compensation is not tied to any advice given.

Avoiding misleading statements: Misleading statements can relate to not only the advice on the investments, but also on the compensation. This one is hard because how would someone know if they were misled? In some cases, it can take years before it is discovered. Generally speaking, all of the important information is usually available in printed form and should be handed out. Take the time to read through those papers and point out any inconsistencies.

It is imperative to note that this may or may not be the final rule. There is more that will fully take effect on Jan. 1, 2018, unless the plan is revised, which is what the DOL will be looking into next.

Moving forward

So, what is a person to do when seeking advice on retirement assets? Do not assume all advisers will provide the same advice just because they are all fiduciaries. An adviser might still have some limitations based on the products and tools available to them. Make sure you connect with an adviser who can work through a plan of how the funds would be used, and how the particular investment would help you accomplish that goal. The process by nature takes time, and if you find that you have to make a decision rather quickly, it is a bad sign. Always ask to see multiple choices. Some advisers spend time analyzing different options, but only show one solution. Be aware of multiple solutions and learn the pros and cons of each.

While the fiduciary rule is a great first step toward more transparency between the financial industry and consumers, it would be unwise to assume it solves all of the problems that currently exist. Some companies have decided to stop offering investment advice and some are in the process of reducing their offerings to avoid getting into legal issues. The truth is, the long-term impact from this rule is still being assessed. However, elevating all advisors to the same fiduciary standard is a step in the right direction — a direction that helps you, the consumer.

Ash Toumayants is the founder of Strong Tower Associates, a Retirement Planning firm dedicated to helping clients in all stages of life prepare for retirement. For more than a decade, he has helped hard-working people across Central Pennsylvania prepare for retirement. Investment Advisory Services offered through Retirement Wealth Advisors, a Registered Investment Advisor.