Recently the Department of Labor unveiled the final version of its fiduciary rules that will govern how financial advisors must act in their dealings with client’s retirement assets. The biggest changes were with regard to IRAs, but 401(k) plans, annuities and perhaps the entire client-financial advisor relationship will likely be impacted.

Here are a few areas where individual investors, including your clients and prospective ones, might feel some change. (For further reading, see: How Advisors Can Plan for Fiduciary Rule Changes.)

Better Aligning of Clients and Advisors

The new fiduciary rules will help to align the interests of financial advisors and their clients. Clients who have been working with fee-only financial advisors and registered investment advisors (RIAs) will not notice much, if any difference. RIAs have already been held to a fiduciary standard by the SEC. Fee-only advisors who are members of NAPFA already sign a fiduciary oath.

CFP holders are required to act as fiduciaries when they are giving financial planning advice, but those who work with brokerage firms were not previously fiduciaries when it came to providing clients with investment advice. Financial advisors who provide advice to 401(k) plans and other workplace retirement plans already are accustomed to the fiduciary standards put forth by the DOL as they are similar to the ones that advisors dealing with 401(k) plans have already been held to.

Brokers who were previously held only to the less rigorous suitability standard will now be required to put their client’s interests first in the products and services offered.

The new rules begin to be phased-in in April 2017. The rules will be fully implemented by Jan. 1, 2018. (For related reading, see: The Fiduciary Rule: Advisor and Client Impact.)

An Age of Greater Disclosure

One of the centerpieces of the fiduciary rules is the Best Interest Contract Exemption — the BICE disclosure. The DOL rules mandate a number of situations in which financial advisors will need to have their clients sign a BICE disclosure document. This will be new and different for clients and may trigger a number of questions; both financial advisors who are fee-only and those who earn all or part of their compensation from commissions will be impacted.

Though the final rules were scaled back in terms of their scope and impact from some of their prior versions, there are still many products and services that will require both disclosure and/or justification if used in connection with a client’s retirement account. Among them:

  • Proprietary products such as mutual funds offered via the financial advisor’s employer.
  • Annuities including variable, fixed and indexed annuities.
  • Commissioned arrangements in a client’s IRA.
  • Recommending a rollover from a 401(k) plan to an IRA if that rollover results in higher fees for the client.

In addition, clients currently working with a financial advisor on a commission basis with an IRA will receive a BICE disclosure to sign in connection with this existing business. (For more, see: Fiduciary Rule Prompts New Tech Products.)

What Investors Pay May Change

There has been a lot of speculation about whether these rules will impact the cost of financial advice. The answer seems to be yes; the impact will vary across different situations.

There has been a movement towards fee-based accounts in the brokerage world for several years now, likely in anticipation of the eventual issuance of these rules. This will likely accelerate in IRAs. In some cases, this will be a good thing as clients will fully know what they are paying in terms of fees.

In other cases, clients will find themselves paying 100 basis points or more in fees for accounts where they were formerly trading infrequently on a commissioned basis. Whether the fee-based account will be a better deal will vary. If a client is truly getting a managed account that worth the fees paid and isn’t populated with high-cost mutual funds, then this might be a good deal. Unfortunately, some brokerage wrap accounts are over-priced and deliver mediocre results.

On the other hand, if these rules cause financial advisors to move away from higher-cost, actively managed funds to passive, low-cost index funds and ETFs, this is a win for their clients. In pushing for the rules, the DOL has estimated that retirement investors will save as much as $40 billion in fees over the next decade. Time will tell if this is actually the case. (For related reading, see: Why the Fiduciary Rule Is Good News for Small Plans.)

Dropping Smaller Clients

With cost of compliance likely increasing as a result of the new rules, it won’t be surprising if brokerage firms either drop smaller clients with accounts of under, say, $50,000 or perhaps move them to some sort of robo-based platform.

Investors who are dropped by their advisor or moved to a lower service platform have alternatives. For starters, there are many fee-only financial advisors who members of professional organizations like NAPFA and Garrett Planning Network whose focus is on middle-income clients. Many such advisors work on an hourly or as-needed basis; they might provide a solid alternative for clients who feel under-served.

Robo-advisors might be another alternative for clients who find themselves in need of a new advisor. Traditional robo-services like Betterment and a hybrid service like Vanguard’s Personal Advisor Service are low-cost options and could be a solid alternative for some investors.

The BICE agreement has provisions allowing clients to take legal action if their financial advisor fails to act as a fiduciary. Some observers feel that the rules will generally make it easier for clients to bring legal action against an advisor because they won’t be able to claim that they do not have a fiduciary obligation towards them.

The Bottom Line

The new fiduciary rules will have a dramatic impact on the financial advisory business, especially for advisors who earn some or all of their compensation via commissions. Clients of financial advisors will also be impacted by these new rules, largely for the better. However, they need to pay attention to all disclosures they receive from their financial advisor about any changes in their relationship as a result of these new rules and evaluate how they will impact them. (For more, see: The Fiduciary Rule: How and Why to Outsource Your Risk.)

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