I want to ensure you are in-the-know with regard to the new Department of Labor proposed legislation scheduled to go into effect on April 10, 2017.
An executive order from the new administration has called for a full review, and will potentially delay the new DOL Fiduciary Rule. The DOL ruling proposes that professionals in the financial advice industry be required to act on behalf of their clients’ best interests when providing advice or products for retirement plan participants. In other words, financial advisors are required by this rule to act in a fiduciary capacity for their clients who invest in qualified retirement plans such as 401(k)s, IRAs and the like.
The DOL’s Fiduciary Rule was created in the spirit of helping protect individuals saving for their retirement from large commission-type products created by many financial institutions. These institutions are fighting to have this rule rescinded with their substantial lobbying efforts in Washington so that they can continue to offer high-fee, high-commission products that really only benefit the manufacturers and sellers of these products.
Fiduciaries strive to offer only products that are in the long-term best interest of their clients, and they charge a reasonable fee to do so. Certified financial planners are fee-only advisors. So, there is full transparency in the fees clients pay for the services and asset management they provide.
Why the DOL Fiduciary Rule Is Necessary
You may be wondering why there needs to be a ruling in place to force financial advisors to have their client’s best interest first and foremost in the planning and product recommendations they provide. I am sure many of you think that this level of professional ethics and service for financial advisors should already be the same as is required by our doctors, chiropractors, dentists and even our local food inspectors.
A food inspector monitors the cleanliness and food safety of restaurants. The DOL Fiduciary Rule, in effect, monitors the safety of investment-related advice and product recommendations, such as for the purchase of mutual funds, ETFs, bonds or other myriad products available to consumers inside of their retirement plans.
Just like you have the freedom to go into a restaurant of your choice with confidence knowing the restaurant has met certain criteria from the food inspector for food handling and cleanliness, you will still have the freedom of choice when choosing an advisor for financial planning and product selection. The advisor you choose, however, now has to follow a fiduciary standard when working with you on your retirement accounts. (For related reading, see: What You Need to Know About the Fiduciary Standard.)
What Opponents of the Fiduciary Rule Think
Some opponents to the DOL Fiduciary Rule feel the rule will impede advisors from providing their clients access to advice and products suitable for their retirement savings objectives. The rule does have many new nuances in terms of things like a best interest contract, a requirement for level fees, reasonable fees and other various mandates advisors need to adhere to, this may cause some additional paperwork and disclosures. However, the DOL rule does not impede the mixture of investments investors will have access to. To that point, I offer the following analogy.
Let’s assume on a cold winter day you stop into your favorite lunch spot for a bowl of chili. We know there are different levels of “heat” in chili, some like hot, some like mild, some like almost no heat at all. The same is true for the levels of risk people are willing to take in their investments. Some people can tolerate a large amount of volatility and risk and others want a mild amount of volatility. As I mentioned above, some opponents of the DOL Fiduciary Rule state the rule will impede their ability to provide their clients the investments they can use. This is absolutely false. The rule does not impede the mixture of investments or the amount of risk an investor will be able to take in their retirement portfolios. Similarly, a food inspector does not impede the amount of spiciness a lunch patron wishes to have in their chili at lunchtime. The food inspector merely is providing guidelines for food safety and inspecting the restaurant's food handling process.
Investors Can Change the Industry Standard
As an investor, you will have access to many of the same products you have become accustomed to using. So, whatever the outcome of this ruling, investors should drive financial services professionals to provide better and more transparent service. The power of knowledgeable consumers will force this ruling to become the industry standard.
Whether this rule is upheld, repealed, replaced or modified is irrelevant. The most powerful effect of the DOL Fiduciary Rule conversation has already started to impact the financial services industry. The ruling and implications are now public knowledge as the mainstream media is now covering this legislation along with other legislation enacted in prior administrations.
(For more from this author, see: The True Value of a Financial Advisor.)