What does the recent ruling to strike down the fiduciary rule mean to investors?
Also known as the Conflict of Interest rule, it stated that financial advisers had to give conflict-free advice on retirement accounts, putting their clients’ needs ahead of their own potential compensation. That meant shifting away from commissions on various investment products and being completely transparent.
The Fifth Circuit Court decided the rule defined financial advice and who gives it too broadly, and that it was unreasonable. Opponents argue that it will be too expensive to manage the accounts of small investors, and it’s possible for advisers to charge commissions without conflict. Some proponents of the rule agree that not all commissions are bad, but transparency of fees is key when charging for advice. Unfortunately, small investors are most affected by the overturning of the rule, as they may not be able to afford a financial planner or have enough saved to qualify for some advisers’ services.
What should an investor do?
>> Consider a fee-based adviser or trust company adviser who follows the fiduciary rule standard.
>> Look up potential advisers and what their certifications mean, as well as their backgrounds. Tools like BrokerCheck show any complaints and years of service.
>> Ask how much the adviser is paid and what various fees mean.
>> Know what investment products are being used and how they will impact your strategy.
>> Do your research; consider strategies such as rolling over your assets from a 401(k) to an individual retirement account.
In June, the U.S. 5th Circuit Court of Appeals vacated the Department of Labor’s (DOL) Fiduciary Rule, which went into effect in June 2017. Striking down the rule means that traditional stockbrokers are not required by law to act as a fiduciary for tax-advantaged accounts like IRAs. In the lead-up to the new rule, many brokerage firms adopted policies that required their brokers to act as fiduciaries, although some of those firms have stepped back now that the DOL rule has been vacated.
For investors, the change means that they have to be as vigilant as ever about who they turn to for advice. Investors should ask their current or prospective advisers directly: Are you a fiduciary for all
clients, all of the time? Will you always put my interests first? If the answer isn’t a simple ‘yes’ to both questions, you should find someone who is and will. Many fine professionals aren’t fiduciaries, but many are. Why not work with someone who has opted to serve clients in this way?
Investors also should be on the lookout for new rules coming from the Securities and Exchange Commission. Many observers thought they should have pushed the rules through before the DOL and were a little embarrassed that they didn’t. Now it appears that they are taking up the cause, although it’s always difficult to know what the government will do until it acts.