The U.S. Labor Department shook up the retirement plan landscape in early April. They ruled financial advisors managing retirement accounts must adhere to a “fiduciary” standard of care. The enforcement date will begin January, 2018, and, in typical government fashion, it took them nearly 1,200 pages to spell out all the guidelines and parameters. In simpler terms, all those in the business of providing advice on how to invest your hard-earned money must do so with your best interests in mind, while providing full disclosure on fees and compensation collected. Seems appropriate, so why all the backlash and controversy? Why a federal lawsuit from multiple special interest groups attempting to block the ruling?
Opponents suggest costs will rise for account holders, and the willingness of advisors to serve smaller accounts will diminish because of the additional liability. You can spin this a hundred different ways, but in the end, the investor community needs true, transparent help – however we get there. Far too many people have been duped into bad investment products, and incur exorbitant costs along the way. Holding the advisory community accountable for this on the front end is prudent. There is a reason financial advisors consistently show up as one of the least trusted professions, ranking right down there with car salesmen and politicians.
When an investor is interviewing a potential advisor relationship, they ought to ask three questions in the vetting process:
- How are you compensated?
- How do you invest your money?
- Are you a fiduciary?
If they can’t answer all those questions thoroughly, transparently, without blinking, and to your liking, then you can cross that name off your list. In the context of the discussion above, let’s focus on number three. What, again, does it mean to be a fiduciary, and why does it matter to the investor? Fiduciaries must:
- recommend investments in the clients’ best interests, and
- avoid conflicts of interest and disclose/manage unavoidable conflicts in the client’s favor.
Prior to this ruling, advisors/brokers were allowed to sell an investment as long as it was “suitable,” even if a less expensive or less complicated product was available, with no disclosure of the fact required. That’s not right.
The world of investing has changed in a very short period of time. According to the Investment Company Institute, U.S. investors hold nearly $24 trillion in retirement, with the bulk of those dollars held in IRAs. Not long ago, the pendulum swung from most retirement assets being defined-benefit pension plans. Translation: investment advice is much more critical now than ever before. Individual investors are having to take the lion’s share of responsibility on how their assets are invested, as opposed to earlier times when formulas dictated a guaranteed payout in the future. They need a trusted partner to guide and advise them along the way.
Work with a fiduciary to accomplish all that is most important to you. If your advisor is not legally bound to this standard, ensure you understand exactly what positions are held within your accounts and why, and how much you are paying for those investments and services. Your future, and that of your heirs, depends on it. Stay diversified.
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