DOL Fiduciary Rule: A Step in the Right Direction

New rule improves investor protection, but more should be done.

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After more than 100 meetings, 4 days of public hearings, and a comment period of 5 months during the time since the Department of Labor issued their second proposal last year, the final version of the fiduciary rule was released on April 6, 2016.  Under the new rule, all advisers to retirement accounts (such as 401(k)s, 403(b)s, and IRAs) will be held to a fiduciary standard and are required to always act in the best interests of the investor.  Although this is a win for investors, for some the real news here is that this has not always been the rule for all financial advisers.

According to the press release from the White House, the Council of Economic Advisors found that some investors are losing an average of 1% per year on their retirement savings due to conflicts of interest in the “advice” they receive.  To put it in dollars and cents, the article provided the following example:

“A typical worker who receives conflicted advice when rolling over a 401(k) balance to an IRA at age 45 will lose an estimated 17 percent from her account by age 65.  In other words, if a worker has $100,000 in retirement savings at age 45, without conflicted advice it would grow to an estimated $216,000 by age 65 adjusted for inflation, but if she received conflicted advice it would grow to $179,000 – a loss of $37,000 or 17 percent.” [1]

Currently, a financial professional could be working for a client under a fiduciary standard (working solely in the client’s best interests), or the less stringent “suitability” standard (suitable based on risk tolerance, financial needs, goals).  Neither can be completely free from conflicts of interest; however, fiduciaries are required to minimize wherever possible and disclose all conflicts of interest to the client, while those working on a suitability basis do not have the same requirements.

By January 1, 2018, all financial advisers providing advice to retirement plans will be required to be in full compliance with the new rules.  While the new rules do not cover non-retirement accounts and time will tell how effective the changes are in benefiting investors, the fiduciary rule for retirement accounts is regarded as a step in the right direction with further developments expected from the SEC in the future.

Until we live in a world where the norm is for all financial professionals to always act in the best interests of their clients, it will still be necessary for investors to do their due diligence when deciding to work with a financial adviser.  In addition to asking a financial professional whether they are a fiduciary, an investor should also ask how they are compensated and whether they are required to disclose any conflicts of interest in the relationship.  For more information on choosing the right adviser for you, please read our blog titled Choosing the Right Financial Adviser.

[1]Fact Sheet:  Middle Class Economics: Strengthening Retirement Security by Cracking Down on Conflicts of Interest in Retirement Savings, Office of the Press Secretary, April 6, 2016.

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