For the 21 million retirement plans and IRAs out there, with a combined $13 trillion in investments, there’s a new sheriff in town.
His job? Crack down on the “conflicted” investment advice that costs retirement account owners an estimated $17 billion each year in unnecessary commissions and sales charges.
The new sheriff doesn’t actually look like Gary Cooper in “High Noon.”
But the new rules announced last week by the Department of Labor – weighing in at over 1,000 pages – are definitely creating a stir.
Supporters say they will encourage more financial advisors to start working for you and not against you.
The new rules – targeted at stockbrokers, insurance agents, and other commissioned salespeople – will require the person advising you on your retirement strategy to be a “fiduciary” and put your interests first.
Hardly sounds revolutionary, right? But until last Wednesday, that hasn’t been the case. As Jason Zweig reports for The Wall Street Journal:
“Most brokers are under no obligation to do what is best for clients. Repeated surveys have found that investors believe—incorrectly—that anyone offering investment advice must put a client’s interests first. Instead, as long as they sell products that can pass muster as suitable, they are generally free to push offerings that earn them the highest fees, even if cheaper alternatives would be better for the investor.”
“Brokers’ recommendations to this point have only had to be “suitable”—a less rigorous standard that critics say has encouraged some advisers to charge excessive fees, favor investments that offer hidden commissions and recommend securities that can be difficult for investors to sell.”
To put this in contrast, our firm – Adam Financial Associates – has always been a “fiduciary” and 100% on the side of our clients. We’re doubly required to be a fiduciary, both as a Registered Investment Adviser (RIA) and as a Certified Financial Planner® (CFP).
The new rules will take several months to phase in, but here’s some changes you should expect:
- The cost of investing might go down, as excessive commissions on high-cost funds and annuities often sold to retirees could be replaced with more customer-friendly investments like no-load funds, index funds, ETFs and other choices offering “reasonable” fees.
- Brokers are already complaining that the new rules will cost them money, and some warn they’ll be forced to close or move smaller client accounts or charge higher maintenance fees. That makes this a good opportunity to consolidate holdings and search for better value from an advisor who provides you with financial planning and retirement advice, as well as investment guidance.
- Investors should gain a better understanding of the true costs involved when they “rollover” their 401(k) to an IRA through a commissioned salesperson. In the past, many investors were hustled into costly real estate funds and annuities without fully understanding the impact on their bottom line. In the past, these commissions have amounted to up to 10% of the money invested, says Zweig.
The Takeaway: Unlike the brokers targeted by the new rules, our firm is already a fiduciary and puts clients first, by law. We use no-load, no-commission, lower-cost investments for clients. The new rules aim to subject brokers and insurance salesmen to the same regulations as firms like us, to better protect investors. Expect profound changes – and a rocky road – ahead as the new rules go into effect.