Who says government is always the enemy? The Department of Labor is launching a new rule for financial advisers that will put money in your pocket: Some $40 billion over the next decade could be saved by individual investors. It’s one of the best financial life hacks in recent memory — a positive, disruptive game changer for investors.
While the rule is not perfect, it hopefully will prevent agents and brokers from selling you money-devouring products for your retirement plans. It’s a quantum leap ahead in ensuring that you can save more for a dignified retirement.
The DOL rule is simple: Retirement advisers of any stripe must work in your best financial interest and disclose any conflicts. The biggest benefit to retirement savers is that may create a speed bump for broker-advisers, who were selling overpriced junk products that do little more than earn commissions for the sellers.
In a practical way, this means that advisers are forbidden from putting you into commissioned products like variable annuities, mutual funds and other insurance products that may not be right for you.
You have the right to know 1) how much money they are making from the sale and 2) whether it’s a good fit for your financial plan or a conflict of interest.
Of course, you will still have access to any financial product, despite what the financial services industry says. You, will, however, have a right to sue an adviser who doesn’t act in your best interest. Think “best fit” advice over mere “suitability,” which was a catch-all that brokers used to sell anything they wanted.
This is a big step ahead for investors, who had to submit to industry-controlled arbitration forums if they wanted to take action against brokers and agents who wronged them. The consumer protection of investors under the new rule has just been dialed up 100 times.
Although loopholes in the rule may still permit sales of annuities and other retirement products that have been the subject of numerous investor disputes, the basic premise of the rule is pro-investor.
Advisers providing any advice to retirement plans or investors must be “fiduciaries.” This is a strict legal definition that puts your interests first. They must look out for you by recommending the best-possible — and most cost-effective — retirement vehicles and advice.
Here are the main points of the DOL rule:
— Force Most of the Retirement Advice Industry to Become Fiduciaries.
The rule closes “large loopholes in the definition of retirement investment advice,” the DOL states. “Under DOL’s definition, any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary.”
— Preserve access to retirement education.
“The Department’s proposal carefully carves out education from the definition of retirement investment advice so that advisers and plan sponsors can continue to provide general education on retirement saving across employment-based plans and IRAs without triggering fiduciary duties.”
Your employer can still provide retirement advice. But you also can go outside of the workplace to find qualified fiduciary advisers such as certified financial planners and registered investment advisers.
— Distinguish “order-taking” as a non-fiduciary activity.
This is an incredibly important move. An adviser who works on commission isn’t primarily selling you quality advice, they are selling you products that may not be right for you. If you just want them to take an order to buy, sell or trade a product, that’s different.
“When a customer calls a broker and tells the broker exactly what to buy or sell without asking for advice, that transaction does not constitute investment advice. In such circumstances, the broker has no fiduciary responsibility to the client.”
If you want customized financial advice, you can still approach a financial planner or money manager, but brokers will not be fiduciaries. The DOL makes it clear who is best to provide non-conflicted advice and who’s just selling a financial product.
— You Get More Protection in IRA Transactions.
There are some 10,000 Americans turning 65 every day and some $7 trillion in Individual Retirement Accounts. Millions are rolling over 401(k) balances into IRAs.
The financial services industry smelled the money in these transactions a long time ago and launched concerted campaigns to garner this cash. But individuals have often gotten the short end by being sold overpriced mutual funds and insurance products.
— More “Fee-Based” Accounts. Like any government rule, there are always ways around the best intentions of a law. Brokers who sell retirement advice will likely switch from a commission-based to “fee-based” model.
That means, instead of charging commissions on every product, they will try to get you to put your money in a managed fund or portfolio and charge you a flat 1% annually — plus underlying mutual fund fees — to manage your money. That still could be more than you should pay.
Keep in mind you can build your own portfolios with exchange-traded products that charge less than 0.25% annually. In fact, this rule could be a boon for ETF sellers.
But don’t confuse “fee-based” with “fee-only.” You may not get the service and planning you need with a fee-based account manager. Do they provide comprehensive financial planning that includes guidance on taxes, retirement, cash flow and estate plans? If not, you may be better off with a “fee-only financial planner” who has more in-depth training. You can find a local referral here.
— More Low-Cost “Robo” Portfolios. Don’t want to deal with the added expense of a hands-on money manager or planner? There are plenty of alternatives in the “robo-adviser” arena starting with low-cost fund providers like the Vanguard Group to higher-end robos like Personal Capital and Wealthfront.
With these services, you often have the option of talking to a human adviser, although most of them will set up portfolios tailored to your risk tolerance, age and other preferences. They are usually less expensive than hand-holding advisers. Service varies with the kind of arrangement you choose.
No matter which kind of adviser you choose, you still need to be vigilant to understand what you’re being sold and how much it will cost you. It’s unclear on how the DOL will enforce this rule or whether Congress will try to shoot it down next year. It will probably be subject to a series of lawsuits. Brokers and insurance agents despise this rule. And much depends upon the November election.
Yet one thing is clear: Advisers should always be working in your best interest. Now you have some legal backing to demand that they all be responsible and prudent professionals. This doesn’t mean that they will all be honest and upright. You’ll still need to do your homework.