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The DOL Fiduciary Rule: What Does It Mean for Your Money?
When you hire a financial advisor to help you manage your money, they’re recommending the best investments to help you achieve your financial goals, right? Well, not always, and that’s one reason for the Department of Labor’s Fiduciary Rule, expected to go into effect this month.
Despite confusion over how the DOL Fiduciary Rule will be implemented — and efforts to stall its progress — it appears a version of the law will go into effect on June 9, according to a recent Wall Street Journal op-ed by Labor Secretary Alexander Acosta.
“We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input,” Acosta wrote. “Respect for the rule of law leads us to the conclusion that this date cannot be postponed.”
And with this statement, an era of uncertainty is born. For every positive the new fiduciary rule brings to the table, critics worry there will be consequences as well.
What Is the DOL Fiduciary Rule?
In case you haven’t heard about the DOL fiduciary rule, here’s the gist of it: The Obama Administration came up with the idea of a fiduciary rule that governs financial advisors and other financial professionals. The rule, which has shape-shifted a few times since then, was intended to govern best practices of financial professionals, requiring all financial professionals to be elevated to the standard of “fiduciary” – meaning they must act in the best interest of their clients and disclose any potential conflicts of interest.
“The fiduciary rule will help to ensure that financial institutions act in investors’ best interests when providing retirement advice,” notes Seth Rosenbloom, associate general counsel at Betterment. “Effective June 9, the rule requires anyone who provides retirement investment advice for a fee to act in the best interests of their customers. Additional investor protections will go into place in early 2018, unless the rule is modified or delayed by the Department of Labor.”
Since all fiduciaries are legally and ethically required to act in the best interests of their clients, the rule is intended to help the average investor. As a fiduciary, a financial advisor would be required to manage a client’s assets in a way that that best serves the client, rather than for his or her own profit. That means fiduciaries can’t benefit directly from the management of assets — for example, by recommending an inferior investment product because it pays a higher commission. They must also be completely transparent throughout the investing process, taking special care to avoid any conflicts of interest.
All fees charged by financial advisors after the law is implemented must be shared with specific dollar amounts to all clients in their care. As such, the new rule could effectively eliminate many of the commission structures that currently dominate the financial industry.
Advocates for the law say it will protect average investors and help future retirees save money by reducing fees and red tape. The law would also make it perfectly clear whether financial advisors are fee-only — that means they give unbiased money advice for a flat fee, as opposed to taking a commission on particular investment products — and how they’re ultimately getting paid.
Critics of the law offer the opposite view – that a new law on the books will only increase red tape, and the burden of compliance may push some advisors out of the field. They also claim that the new law could be expensive, effectively increasing costs for investors across the board.
The Trump Administration has delayed the rule so far, citing issues with regulation and worry over implementation. Administration officials also worry that the cost of compliance will be damaging to both financial professionals and investors.
“The basis behind the delay might be due to the current administration’s statements moving towards fewer regulations across the financial services,” says Robert Kirk, vice president and principal consultant in the wealth management practice at Mphasis, a large IT services shop.
“Officials, including the president, have stated their views that more regulation negatively impacts investors because the cost of compliance will be passed through to the individual Investors,” says Kirk. “In turn, this may not help empower Americans but rather hinder them and their access to the right financial advice, products, and services.”
Why Some Financial Advisors Say ‘Yes’ to the Rule
Will the fiduciary rule hurt or help? It depends on whom you ask. According to Rosenbloom, it all boils down to education – as in, individual investors need to become educated on how the financial services industry works.
“Many investors are unaware that their retirement account managers and advisors are currently under no obligation to act in their best interest,” says Rosenbloom. “These money managers consider whether a particular recommendation will result in a higher commission or kickbacks to them, rather than just whether the recommendation is right for a particular investor. As a result, investors working with money managers that are not bound by the fiduciary standard are likely to end up in a sub-optimal and higher-cost portfolio.”
Rosenbloom and others at Betterment agree that the fiduciary rule is a necessary step toward improving retirement outcomes for millions of Americans. The fiduciary rule will “eliminate problematic practices in the retirement advice industry,” he notes. “The rule is part of the industry’s shift toward ensuring that everyone receives honest and high-quality retirement advice.”
Some other financial advisors I spoke to agree with the sentiment that, despite the upfront growing pains and hassle of compliance, a rule needs to be in force.
“Lack of transparency in our industry causes a decrease in trust from our clients,” says Jackson. Ultimately, he says, it’s the client who gets hurt the most. Either they disengage from the system and don’t hire a financial advisor. Or, they ignore their finances and investments because they don’t trust the advice they receive.
Financial advisor Joe Carbone of Focus Planning Group and popular blog Social Security Teacher believes the problem runs much deeper than that, however. We need a law on the books, he says, because the public is confused.
“What makes me sick is my industry is to blame,” says Carbone. “We have done everything possible to confuse and deceive the public. Just think about how many titles we have… Financial Advisor, Financial Planner, Wealth Manager, Wealth Advisor, Money Coach, Wealth Coach,” he says. “And I can keep going.”
“In a free society,” says Maryland-based fee-only financial advisor Martin A. Smith, people deserve to know the truth about the financial professional they hire to manage their assets. Freedom, he says, is “being able to choose whether they prefer to work with a financial professional who essentially does not have to put the interest of their clients before their own interests, or that of the firms which they represent.” How can we give people the ability to choose when the financial services industry is currently set up to fuzzy the lines as much as possible? We can’t.
Passing the fiduciary rule is “the right thing and the ethical thing do,” says Kansas City-based financial planner Clint Haynes. “When a client isn’t aware nor told that a conflict of interest exists, then there’s clearly an ethical issue facing that advisor, whether they want to accept it or not.”
Would you send your sweet grandmother to a fiduciary, who is going to put her interests above their own? Or to someone who might recommend a less suitable investment — perhaps one that pays advisors a higher commission — knowing there’s the possibility of a conflict of interest?
“I think answer is quite clear,” says Haynes.
Fiduciary Rule or Not, Here’s What You Should Do
While the new fiduciary rule should fall into place this month, the full-scale implementation of the law may take years. Further, government officials plan more negotiations on the law – negotiations that could water down its protective features.
Chicago-based financial planner Roger Wohlner says that, law or no law, it’s up to each of us to find a financial advisor who works in our best interests. If you’re already working with a fee-only advisor who is a fiduciary, he says, the new rules are more “hype than substance.”
Fortunately, “there are tens of thousands of financial advisors who have willingly chosen to be a fiduciary,” notes Taylor Schulte, San Diego financial advisor and founding member of the San Diego Financial Advisors Network.
“You don’t need to wait for a law to pass to get objective, conflict-free advice,” says Schulte. “The firms these financial advisors represent are also known as fee-only. A quick Google search or a visit to NAPFA.org will reveal the firms near you that adhere to these standards.”
Regardless of what happens with the fiduciary rule, protecting yourself – and your money – starts with knowing which questions to ask. When considering a financial advisor or vetting your current one, start asking the right questions, says Rosenbloom.
For example, who makes money from your account? And how much? Does your advisor make more money for recommending certain investments over others? Are they committed to putting your interests about their own at all times?
“You shouldn’t be embarrassed to push, and if you don’t get the answers you want, it’s okay to walk away,” says Rosenbloom. After all, a true fiduciary should have no issue answering those questions and others. But, if you see your advisor squirming in their seat, you’re right to worry.
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Are you worried about the impacts of the DOL Fiduciary Rule? Why or why not?