If you’re an investor, you’re probably aware that there are big changes taking place in the financial industry. Chances are, you’ve heard of something called the new DOL fiduciary rule being phased in over the next few years. You might even know that it changes the way financial firms and advisors manage money in retirement accounts. When it comes right down to it, though, do you know exactly how this new law affects you?
Unfortunately, there is a lot of confusion about what the DOL fiduciary rule means for investors on a day to day basis. With the phase in set to be complete in 2019, it’s a good time to read up on how your life as an investor will change.
Change #1: Your advisor is now legally a fiduciary
According to the new rule, all financial advisors who manage retirement accounts are now considered fiduciaries. A fiduciary is someone who has a legal and ethical obligation to put another person’s interests ahead of their own.
If you have a good financial advisor, this change should actually mean very little. A good financial advisor has your best interests in mind whether they’re legally obligated to do so or not. However, if you do find yourself in a situation where an advisor is not putting your interests first the new law provides a layer of legal protection that wasn’t there before.
It’s worth noting that there are some advisors who have trained and committed to operating as fiduciaries prior to the passing of this new law. To see if your advisor is one of these, look for the AIF® or AIFA® designations after their name. Or check to see if they provide their advisory services as “Investment Advisory Representatives”. These advisors have completed extensive education and exams over and above industry requirements.
Change #2: Your advisor will face fewer conflicts of interest
Before the DOL rule, it was possible for financial advisors to make recommendations that weren’t necessarily in your best interest. Financial advisors were required to prove that any investment or strategy they recommended to you was suitable for your portfolio, but not that buying it or selling was the best financial decision.
So, theoretically, an advisor could legally recommend that you buy something just to earn a commission on the sale even if it wasn’t the best time for you to buy that thing or even if there was a similar thing you could buy for much cheaper. Likewise, they could recommend that you open up a particular type of account regardless of timing or cost.
In a perfect world, your advisor is someone you can trust when a conflict of interest like this arises. Unfortunately, there are crooked people in every profession. The DOL rule makes it simple. Your advisor must put your interests ahead of their own or face the legal consequences.
Change #3: Your fee structure may change
The new DOL fiduciary rule also might affect the way your fees are structured. Regulators are pushing flat rate compensation for advisors and many advisors are moving to that model.
So instead of paying your advisor commission you would pay them a flat fee for their advice. This again, ensures advisors won’t get paid more for recommending one investment over the other because what they get paid won’t be tied to the types of investments you choose.
Change #4: Your fees will be more transparent
Internal fees that may currently be built into the cost of shares will probably be stripped out, charged, and itemized separately on statements. Investors will need to take a big picture view when they start to see these fees on their statements.
If you see new fees on your account in the coming years, take the time to have a conversation with your advisor to clarify. While the DOL changes might cause increases in fees, it’s likely that at least some of the new fees you could see are fees you were already paying. You’ll just be seeing them more clearly.
The bottom line is that seeing fees more transparently can be uncomfortable, but ultimately it’s for your benefit.
So what’s the catch?
The fiduciary rule could be a net benefit for investors, but that doesn’t mean there aren’t drawbacks. The new standards will result in a lot of new costs for financial firms and advisors. The industry as a whole will need to invest significantly in personnel and technology to track and enforce these new rules.
Those opposed to the DOL rule point out that increasing costs for financial firms and advisors might not be a good thing for the investors who do business with them. To remain solvent, some firms may decide to pass on those costs in the form of increased fees. They may also decide to limit the types and number of investment options they offer in an effort to make account activity easier to track by people hired to enforce the new rule.
It’s also possible that the changes brought about by the DOL rule will prompt some sensitive investors to choose not to invest altogether or to move their accounts to low cost and low service online providers. At a time when investing is more necessary and more complex than ever, though, this could be a real loss for those people.
Fewer investment options, possible fee changes, and decisions to uninvest or invest with low cost and low service providers aren’t guaranteed by the new DOL rule, but some do believe they could be the result. Obviously, these things could place a significant burden on investors already struggling to secure their retirement in the face of stagnant wages and increasing cost of living.
Now we wait
In the near future the DOL fiduciary rule means investors can look forward to increased transparency and fewer conflicts of interests. In the end, this should be good news for most investors.
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David Wilson, writer at Financial Truths, is also a financial advisor and Certified Financial Planner® at Vector Financial Solutions, Inc. Vector Financial Solutions is located at 139 E. 3rd Ave., Escondido, CA 92025 and by phone at 760-741-3159.
