When hiring a financial advisor to manage your portfolio, there’s an automatic assumption the advisor will put your interests above his or hers. Unless your advisor is acting under a fiduciary standard, however, there’s no guarantee that he or she is bound to do so. (For more on this topic, see Choosing a Financial Advisor: Suitability vs Fiduciary Standards.)
The Department of Labor is attempting to provide more widespread protection for investors by instituting a new fiduciary rule, which would generally require advisors who manage qualified retirement accounts to act as fiduciaries. There’s a potential hitch in the plan, however, that retirees need to be aware of.
Under the guidelines established by the Department of Labor, financial advisors would be bound by something known as a “Best Interests Contract Exemption” or BICE. This contract would govern an advisor’s or broker’s ability to earn commissions when offering conflicted advice. Clients would have to agree to allow an advisor to do so through this contract, and in exchange, the advisor would be bound by the fiduciary rule. Another key caveat of the DOL rule would require advisors to provide full disclosure regarding the nature of the investment products they’re selling and the associated commissions.
This benefits retirees because it’s designed to curb advisor actions that may result in higher management fees or that steer retirees toward investments that aren’t necessarily the best fit. (For more on advisor fees, see: A Guide to Investor Fees.) There is one caveat, however, in that your advisor can ask you to opt out. If you’re not paying attention, it’s possible that you could do so without even realizing it.
The Department of Labor allows advisors to request an exemption, which will take the form of a letter or email communication outlining what the provisions of the new fiduciary rule are and specifying what you need to do to take advantage of these protections. If you don’t respond to this request in writing, acknowledging that you wish to have the fiduciary standard apply, you’re effectively waiving the protections through negative consent. (See also A First Look at the Finalized Fiduciary Rule.)
Retirees who don’t take advantage of the fiduciary rule may be opening themselves up to higher fees on their retirement accounts. This is particularly problematic for investors who have significant assets in an IRA. If your advisor is concentrating your holdings in high-fee mutual funds to generate larger commissions, the cost can stunt your portfolio’s growth.
Implementation of the final rule is set for April 2017, but its full provisions aren’t expected to be effective until January 2018. Investors will likely begin seeing exemption requests show up in their mailboxes in the months prior to the April start date, assuming the rule doesn’t undergo any further revisions that would cause delays.
There is a possibility that the rule could be quashed altogether. Lawmakers and top industry trade groups have been vocal in their opposition to the fiduciary rule. Among the primary arguments is that the increased costs associated with compliance would be passed on to investors, which could potentially price those in the lower- to middle-income range out of the market altogether. (For more, see: The Fiduciary Rule: What It Means for Investors.)
Assuming the rule is allowed to take effect without any major changes, retirees should be on the lookout for communications from their advisor or brokerage. If you’re concerned about missing your exemption notice, you can take proactive steps to safeguard your investments by asking your advisor to provide a written statement acknowledging that he or she acts in a fiduciary capacity. This statement should also require the advisor to disclose conflicts of interest and the fees involved with each investment.
The fiduciary rule is intended to insulate retirees and other investors from unsavory practices where their retirement accounts are concerned. At this time, the rule doesn’t extend to taxable investment accounts. The most important takeaway for seniors is to be aware of the coming changes so that they can act accordingly to make sure their investments are safeguarded.