As it turns out, the widely ballyhooed Department of Labor (DOL) Fiduciary Rule for retirement accounts has become a fixture after all. It was partially implemented earlier this month and will be fully implemented in January 2018, and this is generally a good thing for retirees and future retirees.
The rule had been slated to go into effect in April, but President Trump in February signed an order delaying implementation without a concrete expiration date.
The Fiduciary Rule means that all advisors to retirement investors must give advice in the best interest of the investor, not their own. They must also charge reasonable compensation and make no misleading statements, and they must sign a contract with the client for each retirement account over which the planner is offering advice.
As long as retirement advisors meet these standards, they can still recommend proprietary products. Proponents of the rule contend it is critical to shielding retirement clients from conflicts of interest.
Registered investment advisors (RIAs) already had to act in a fiduciary regard. Under the new rule, all investment professionals — brokers, planners and insurance agents, as well as RIAs — are also now held to the fiduciary standard when making financial recommendations for retirement accounts. This is good. Before implementation of the rule, some insurance agents, for example, commonly misrepresented and wantonly sold fixed indexed annuities to retirees solely because they pay among the highest commissions. If they continue to do that, they can be sued, effective in January.
Some financial planners have argued that the rule is not necessarily good because it prods financial planners to move all retirement clients into fee-only investment accounts, which charge about 1% of assets under management annually. That might be a bad thing if you are a retiree who buys a couple of annuities at one point in time and purchases little else over the years. A retiree like this might prefer buying these annuities and paying only one-time commissions. Regardless, the new rule is now law and, in any case, not all planners will move the aforementioned retiree into a fee-only account.
Before the Fiduciary Rule was put in place, all but RIAs were held to the suitability standard, which maintained that advisors recommend only “suitable” investments for their clients, as opposed to actively putting their clients’ best interests first. As long as an investment met the client’s stated objective and needs, it was considered suitable. Sounds good. But that left open the door for advisors to act in their own best interests while simultaneously providing “suitable” recommendations.
A battle over the fate of the Fiduciary Rule is not altogether over. The DOL is still conducting a review of the rule, as mandated by President Trump, and there will be opportunity for additional public input, including thoughts on a potential delay in the January 1, 2018 date for full implementation.
But this is likely to be much ado about nothing, however, say many financial planners.
Because the Fiduciary Rule has attracted a nearly endless stream of media attention, they say most clients and potential new clients are now aware of what it means to be a fiduciary and, more important, are increasingly demanding a higher standard of care. Many now will work only with fiduciaries. This means financial services providers have to follow the money and uphold the fiduciary standard regardless of any changes in the DOL rule or an extended deadline.
Many financial advisors have already made changes in concert with the intent of the Fiduciary Rule. Consumers, after all, vote with their dollars.
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