Here’s why we care about a fiduciary standard and why all investors should as well. When receiving financial advice would you rather have a financial advisor guide you in way that is always in your best interest or something less?
The Department of Labor recently published a rule requiring financial professionals and companies who provide investment services to retirement plans to operate according to a fiduciary, or, in common language, a “best interest” standard. Why is this standard important to investors? Here’s an excerpt from the fact sheet issued by the DOL.
A White House Council of Economic Advisers analysis found that (these) conflicts of interest result in annual losses of about 1 percentage point for affected investors—or about $17 billion per year in total. To demonstrate how small differences can add up: A 1 percentage point lower return could reduce your savings by more than a quarter over 35 years. In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period after adjusting for inflation, it would be just over $27,500.
The point of the rule is to simply require financial advisors to act in the investor’s best interest and to disclose any and all compensation arrangements that may benefit the advisor (rather than the investor) in recommending one investment over another. It does not mean an advisor cannot receive reasonable compensation for their work.
The response to this rule has been varied, with a number of investment providers, lobbying groups and some politicians coming out against it, in its current form. While the implementation of the rule may need some clarification and/or modification, the goal should be embraced by industry and investor alike. All parties, investors, advisors and financial service companies will benefit by making this rule and standard easily understood and implemented.
So how would investors know today if their advisors are already operating according to this fiduciary, or “best interest” standard? Here are three standards provided by the DOL to certify compliance. The financial advisor and/or financial services firm should:
- State in writing their firm commits to providing advice in the client’s best interest at all times.
- State in writing their firm has adopted policies and procedures designed to mitigate conflicts of interest.
- Clearly and prominently disclose any conflicts of interest, like hidden fees, and backdoor payments that might prevent (or provide a disincentive to) the advisor from providing advice in the client’s best interest.
While this rule currently applies to retirement plans only (e.g., Profit-sharing plans, 401(k), 403(b)), investors would be well-served to make certain all their financial advisors are operating according to this fiduciary, or best interest, standard. There will be many reasons offered by those who would rather not operate according to a fiduciary standard. When you hear this, just remember to go back to the main issue; would you rather have an advisor guide you in a way that is in your best interest or something less?
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