New Fiduciary Rule for IRAs

A large number of people need help managing their long-term finances and hire someone to help them with the process. Some people don’t have the time or desire to manage their assets themselves, while others don’t know enough about the system to manage their assets well.  When selecting an advisor, many people take recommendations from friends and family without doing research into what kind of advisor they are choosing to hire, and to what standards they are legally held.  But if you don’t do your research, how do you know you are putting your money in the hands of someone you can trust to act in your best interest?

It appears that many people nationwide are being taken advantage of under the current system. A new conflict-of-interest rule (Fiduciary Rule) recently published by the US Department of Labor (DOL) will make it a requirement for advisors and institutions to be held to a fiduciary standard if they provide advice on retirement plans and IRA accounts.  The plan will be phased into action beginning April 10, 2017 and all new procedures and systems are required to be in place by January 1, 2018.

There are currently two types of standards to which investment advisors and broker-dealers are held: fiduciary and suitability. In terms of the benefits for the client, a fiduciary standard is a much higher standard.  Most investment advisors follow the fiduciary standard, which requires them to act in the best interest of the client, put the client’s interests first, avoids any conflict of interest and discloses any potential conflicts.  Brokers are held to the suitability standard, requiring them only to make recommendations which are suitable to their client.  On the surface these two don’t seem drastically different from one another, but we notice bigger differences if we dig deeper, especially in the way payments are received.

Brokers are generally commission-based, have a quota to reach, and a salary to make. They receive a payment of a percentage of each fund they sell.  A fund with hefty fees attached to it might be recommended if the broker can make the case that it “suits” the investor, even though there might be a fund with lower fees out there.  Because the broker is also thinking of his/her interest (and that of the firm’s), if the fund with a large amount of fees makes them more money, they probably won’t recommend the one that will cost the client significantly less in fees.  Additionally, bonuses can be awarded for opening accounts, the firm’s success, or for selling lots of funds in a particular category.

Some investment advisors are fee-only, and the client pays the advisor an hourly rate or a percent of the assets. In either case, the advisor does not make a profit off the funds the client purchases.  With hourly work and asset management, the advisor uses his/her knowledge and skills to guide the client towards good investments and smart decisions.  Not only is the advisor required to put the client’s needs ahead of their own, but he/she also has an incentive to recommend funds that will grow your assets.

Even though the Final Rule laid out by the DOL calls for those giving advice on retirement accounts to adhere to fiduciary standards, this rule has been unjustly met with disapproval. One criticism, for example, is that no one will want to work with clients if they have a small level of assets.  This criticism is absolutely incorrect.  Many firms, like Guidepost, still offer hourly financial planning work.  Another common misconception is that annuities and other products will no longer be available.  Unfortunately, a last minute change kept the door open to selling annuities inside IRAs.

Also, keep in mind that this rule does not require advisors to act according to the fiduciary standard when advising on every type of account. Even with the new rule in place, the best way to protect yourself and your finances is to understand how your advisor is compensated and whether they are working for you or not.

From the client perspective the Final Rule created by the DOL should create a positive outcome once it is implemented. Basically, the Final Rule closes old loopholes and extends a fiduciary obligation to a wider range of financial advice related to IRAs. Under the Final Rule, financial advisors and institutions that provide advice to retirement plans and IRAs must provide advice in the customer’s best interest, avoid misleading statements, ensure their compensation is reasonable, and disclose to clients basic information about conflicts of interest and costs.

This makes so much sense, doesn’t it? Guidepost Financial Planning is a fee-only advisor who has always put your interests first.  We do this in every matter, not just IRA investments.  Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.