In accordance with current laws and regulations, financial advisors are not obligated to act in your best interest when you recommend investments for your retirement accounts and provide guidance on your retirement plans. Are you surprised to hear this?
If so, you’re not alone: According to a survey by Financial Engines, the nation’s largest registered independent investment advisor, 46 percent of all Americans mistakenly believe that all financial advisors are trustworthy and are legally bound to put the best interests of their own. customers first when it comes to making recommendations about their retirement savings.
The U.S. Department of Labor (DOL) issued regulations in April 2016 that would require advisors to act as trustees when making retirement savings recommendations. The so-called “fiduciary rule” was scheduled to take effect in April 2017, but its future is in doubt.
In response to intense lobbying from some corners of the financial industry, the Trump administration is moving to block the implementation of the rule. Mr. Trump will sign a presidential memorandum on Friday instructing the Department of Labor to delay implementation of the new rule for 90 days while the DOL reviews it.
In addition, financial industry groups have filed several lawsuits to remove the fiduciary rule, and the GOP-controlled Congress has filed a separate bill to delay the implementation of the regulations.
The Financial Motors Survey shows that many Americans have misconceptions about the rules regarding financial advisors:
- Nearly two-thirds of respondents say they don’t know what a “trustee” is when it comes to financial advisors.
- 41 percent of those who already work with a financial advisor are unsure whether their advisor is fiduciary or not.
An overwhelming majority of respondents support the intent of the DOL regulations:
- 93 percent said it’s important that all financial advisors are legally required to put their clients ’interests first when they provide advice on retirement savings.
- 77 per cent said they would support all financial advisors offering advice on retirement assets to be legally required to put the interests of their clients first.
One of the most important issues that the fiduciary rule seeks to address is the way in which advisors are compensated for making their recommendations. This is because many investment and insurance products pay commissions to brokers and agents, creating the potential for financial conflicts of interest.
The DOL is concerned that some brokers and agents may direct their clients to investments that pay more compensation compared to other investments, even when other investments could reasonably be expected to perform better for the client. The new regulations would avoid this conflict of interest.
The Financial Motors Survey asked respondents about the payment structures that these conflicts generate in investment advice. Fifty-five percent of respondents said these structures “are a bad thing for me,” 35% said “I’m not sure” and only 10% said these structures “are a good thing.” for me”.
Supported by the DOL fiduciary rule there are a number of academics, professional advisory organizations, and consumer groups, such as:
- AARP
- Professional advisory organizations such as Certified Financial Planners, Financial Planning Association (FPA) and National Association of Personal Financial Advisors (NAPFA)
- Federation of American Consumers
- Alicia Munnell, director of the Center for Retirement Research at Boston College
Financial Engines and Garrett Planning Network are two leading financial advisory firms that have said they already act as trustees on behalf of their clients. Financial giant Bank of America Merrill Lynch is taking steps to eliminate potential conflicts of interest before regulations come into force, and other financial institutions are struggling to redesign products to comply with regulations.
Opponents of the regulations accuse the DOL of over-regulation, alleging that the regulations are too complex and heavy. They say the rules will make fewer Americans receive financial advice. Opponents include the American Council of Life Insurance, the Insured Retirement Institute, the Grover Norquist of Americans for Tax Reform and the GOP Congress led by Rep. Paul Ryan.
The end result for retirement investors: You are the best monitor of your investments and financial security. Don’t trust the government to watch you because there is a good chance it won’t.
Be an informed and intelligent investor. Ask your advisor if you have conflicts of interest for compensation. Ask about plans to comply with the new rules. The wrong answer can mean it’s time to change advisors; after all, you can find prominent financial institutions that will put your interests first and you can give them your business.
It’s just some good old American values at work wondering how much you pay and making sure you get good value and fair treatment.
Note: This story has been updated to reflect President Trump’s decision to order the DOL to delay the April implementation of the fiduciary rule.
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- Donald Trump
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