It should go without saying that your financial/investment advisor should be doing everything possible to protect and increase your assets—everything that’s in your best interest, not theirs. But until recently that has not always been the case.
On April 6, 2016, the Department of Labor (DOL) released the final rendition of its “fiduciary rule” regarding conflicts of interest in retirement savings. More on that in a minute.
Until that point, financial advisors had been regulated under two different standards of conduct—some advisors had a fiduciary standard, and other advisors did not. It may come as a surprise to some investors that their financial advisor was not required to put their client’s best interests above their own.
Investment advisors registered with the SEC or a state securities regulator are fiduciaries. This requires the advisor, by law, to act in the best interest of their clients, which means always putting the client’s interests ahead of their own. They must also continually monitor not only a client’s investments, but also any changes to their financial situation. These advisors usually work through a Registered Investment Advisory firm or RIA.
Financial advisors, registered representatives, brokers, wealth managers, insurance agents, etc. and others who provide investment advice are regulated by FINRA (Financial Industry Regulatory Authority) or by state insurance regulators and have been subject to a “suitability” standard of conduct. That means that as long as the product they were selling you was suitable for you at the time of the sale, then they had no obligation to monitor that product to make sure it was still suitable for you after the sale was complete.
The new DOL rule released in April, which takes effect in April 2017, is an attempt to require all advisors, by law, to put their client’s interests above their own. But the new rule applies only to investments in retirement savings (401k, IRA, etc.). Also, the DOL rule doesn’t ban commission-type products or revenue sharing, but it requires advisors who accept commissions on these products to have clients sign a Best Interest Contract Exemption, or BICE. In this document, the advisor pledges to act in the client’s best interests and only earn compensation that is “reasonable.” The exemption will also create some transparency, as the advisor must also disclose the fees involved and any conflicts of interest.
The newly required transparency in fee disclosure could have the biggest impact on the annuity business. The high-commission variable annuities and indexed annuities used for qualified accounts are expected to take the biggest hit once consumers become aware of the costs of buying these products. Experts expect sales of these types of products to fall around 25% to 30%.
Overall, this change will to take a while to be fully implemented and all the effects are not fully known. But increased transparency and investors’ interests being made a higher priority is ultimately a good thing. But really, shouldn’t your advisor have already been doing that? Yes, if he or she has your best interest at heart.
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