Countless working Americans turn to financial advisors for help in saving for retirement and meeting their long-term financial goals. But it looks like a new rule designed to safeguard everyday investors from unscrupulous advisors will now experience further delays. In August, the Department of Labor put forth a proposal seeking to delay several provisions of the fiduciary rule to July 2019. This represents an 18-month lag from the original date of January 2018, at which time the rule was initially supposed to take effect in full.
Not only does delaying the rule expose savers to lackluster advice for longer, but it could also cost them billions of dollars in the process. And that's just not OK.
What is the fiduciary rule?
Unbelievable as the following may seem, for years, financial professionals weren't required to offer clients the best possible advice for their retirement savings. Rather, they simply had to conform to what was known as the suitability standard. Under this standard, advisors can legally get away with recommending investments to clients that technically suit their needs, even if they're not the most cost-effective.
The new rule, however, seeks to change all of that by forcing professionals to act as fiduciaries. Fiduciaries must act in their clients' best interests at all times, even if it means losing out on commissions.
Here's how the difference might play out in practice. Say you're an investor with a moderate risk profile and your financial advisor has two funds available that align with your agreed-upon strategy. Both funds will, based on projections and past performance data, offer a 6% average yearly return over the next two decades, but whereas one will cost you 1% of your investment balance in fees, the other will cost 2%. Clearly, all other things being equal, you'd rather go with the fund that charges half the fee, but if your advisor gets a larger kickback from the one charging 2%, that's the one he or she is likely to push. Now under the suitability standard, that's perfectly legal. Under the fiduciary rule, however, that sort of practice wouldn't fly.
That's why the fiduciary rule is so critical to investors. It's estimated that the way financial professionals typically do business costs Americans approximately $17 billion per year, and results in annual returns that are a full percent lower than they should be. With the rule fully in place, those who utilize the help of advisors can't as easily be taken advantage of.
Delays will cost you
Unfortunately, an 18-month delay of the full implementation of the fiduciary rule will cost retirement savers $10.9 billion over 30 years, according to the Economic Policy Institute. A bigger concern, however, is that the proposed delays are only masking what's really an attempt to quash the rule completely, since it hurts the financial industry on a whole.
Of course, the fiduciary rule is hardly a cure-all for dishonest behavior among financial professionals. Even once fully implemented, it's only designed to cover retirement accounts, which means that if you use an advisor for everyday investments, he or she will still have the suitability standard to fall back on. Still, it's a start.
While you may need to wait an additional 18 months to benefit from the fiduciary rule in its entirety, for now, you can protect yourself by vetting your advisor and making sure that person is reasonably trustworthy. Talk to other people who have used his or her services, for example, or only go with someone who comes with a first-hand recommendation. You should also read up on any investments your advisor recommends and ask for a full disclosure of fees so that you're able to compare your options. By being proactive and vigilant, you can protect your own financial interests in the absence of a fully effectual rule to do it for you.