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For the past several decades, many retirement advisors -- particularly those who work on commission -- have been able to stay compliant with SEC and FINRA regulations by offering products and services that were considered to be "suitable" for their clients. This suitability standard was easy to meet, as any product or service that was deemed "suitable" could be sold to a client. But this lax standard has led to widespread abuses in the retirement planning industry, as many advisors have recommended "suitable" products that just so happened to earn them high sales commissions -- regardless of whether there were better and/or lower-fee products available.
For this reason, the Department of Labor has stepped in and issued a new rule that will go into effect on April 10 of this year. The rule states that all advisors who work with retirement plans or accounts in any capacity will be held to a higher standard known as a fiduciary standard. Advisors who work in this capacity must unconditionally put the client's best interest ahead of their own. Needless to say, this rule has met strong opposition from several groups in the financial industry and is now being contested in court, as opponents allege that the DOL has overstepped its authority in implementing this rule.
A step forward
However, this development is great news for anyone who's saving for retirement. The DOL fiduciary rule will effectively prevent financial planners and advisors from selling high-commission products that are not best for you, and it will make fee-based accounts much more prevalent in the industry. Paying a flat fee or a percentage of assets to an advisor may be much cheaper for you than having to pay a transaction fee every time you buy or sell something.
If you have an advisor, or if you're thinking of hiring one, here are some questions you should ask him or her regarding the new rule:
- What are you doing to ensure that you are putting my best interests ahead of any possible conflicts of interest you may have?
- What steps have you taken or are you taking to comply with the new fiduciary rule?
- Are you already acting as a fiduciary, or will this be a major change for you? (If your broker or planner is a Registered Investment Adviser, then the answer to the first part of the question will be yes, because they are already held to a fiduciary standard under SEC regulations.)
Your advisor should be able to answer these questions clearly and explain how they will be compensated for their services. The advisor should have a written policy statement that says they will provide unbiased advice and should also be able to outline the steps they are taking to comply with the new fiduciary rule. If you engage in a transaction that will pay the advisor a commission after the rule goes into effect on April 10 of this year, then you should also expect to fill out some additional paperwork to satisfy the Best Interest Contract Exemption requirements that are mandated under the rule. These documents will spell out how much the advisor is getting paid, among other things.
Know your rights
If you feel that your broker or advisor is not meeting their fiduciary obligation to you, then you have the right to take them to arbitration to resolve the matter. If you are part of a group of people who have been harmed by an advisor's actions, then you now have the authority to file a class-action lawsuit against the advisor under the new rule. And these provisions apply even if the broker or planner merely provided you with bad advice and did not perform any actual transactions. The new fiduciary rule is ultimately designed to increase the level of accountability that advisors have to their clients, so you can feel more confident that your advisor is genuinely acting in your best interests.
There are several places online where you can go to find a fiduciary planner. One of the best places to start would be the planner search engine on the Certified Financial Planner Board of Standards website. Those who carry this credential are required to act in a fiduciary capacity in all of their dealings, regardless of their license or business model. The Financial Planning Association website is another resource for finding a fiduciary planner. You can also find out if your advisor has any disciplinary history by looking him or her up in FINRA's BrokerCheck or the SEC's Investment Adviser Public Disclosure database. Also visit your state's insurance commissioner website to find out if they have committed any insurance-related violations.
