If you follow the news on personal finance-related matters at all, you’ve probably heard about the delay in implementing the third part of the Department of Labor’s fiduciary rule. This is the rule that mandates financial advisors who offer retirement investments—no matter who they are—must act in the “best interest” of their clients. It’s a code of ethics anyone would presume is already required, even though in reality, 90% of financial advisors are not legally required to follow this basic standard. That’s because 90% of financial advisors don’t work for you. They work for the brokerage firms who pay them to sell their products.
Here’s how to know if the delay in the rule affects you
Advisors at brokerage firms sell investments and strategies that typically cost you a lot more in hidden fees and then those investments tend to underperform the benchmark indices. That also goes for insurance companies that offer retirement investments. Take a look at this graph to see how much money you can lose by overpaying to invest using a typical big brokerage firm.
Worse than high fees and lousy advice, according to Harvard Business Review, too many, 1 in every 12 advisors at brokerage firms have complaints and serious violations on their background records.
Delaying the full implementation of a rule that protects consumers from subpar advice means clients who rely on the big name broker-advisors for serious investment advice for their retirement savings are leaving themselves wide open to conflicts of interest and more potential risk. The conflicts includes aggressive sales tactics, but most of all, these brokerage clients may not even realize when they opened their brokerage account, they also waived their legal right to sue the advisor (or his firm) if the advice turns out to be totally inappropriate and the client loses money.
“Please, excuse me from working in your best interest”
If you’re working with a salesperson or representative at a brokerage firm right now, you especially need to know about something called the “best-interest contract exemption,” or BICE. This clause sounds like some kind of joke, but it’s not. This is a contract that does exactly what it says. By signing it, you’re giving your advisor permission to sell you an investment that may not be in your best interest, and the DoL’s fiduciary rule allows brokers can ask you to sign one. It’s a loophole for brokerage firms and insurance companies and also a concession the rule is allowing for brokers who want to call themselves “fiduciaries” but still plan to do business as usual by selling investments with hefty commissions that are only “suitable” rather than “best” for their clients—adhering to the lower suitability standard instead of being a true fiduciary.
Unfortunately, this ‘best-interest contract exemption’ may give some investors a false sense of security at a time when they need to continue being just as vigilant as ever, and the fact that the rule’s implementation was delayed doesn’t change this.
Consumers don’t hear as much about the 50,000 or so independent financial advisors who aren’t salespeople or insurance agents. These are investment advisors, wealth managers or financial planners who register with the SEC and therefore, must strictly follow the higher fiduciary standard. With or without the fiduciary rule in place these independent advisors have to put your interests first, and they typically have access to every available investment product. The difference is, they work only and directly for you so it is in their best interest to find the best performing investments at the lowest possible cost.
Here’s how to put your knowledge to work right now:
- Demand full transparency so you can easily see and understand all fees and expenses.
- Only choose an advisor who follows the fiduciary standard and is willing to put that oath in writing.
- Go over every page of the contract with your advisor before you sign any of it so you can understand what each page means as far as your rights and your advisor’s responsibilities. This will also protect you from signing any ‘best-interest contract exemption’ without being aware of it.
Consumers should always be entitled to the protections the fiduciary standard sets forth without needing a new rule or pressure to force an advisor into a fiduciary role. If a financial advisor doesn’t want to bother acting as a fiduciary, why would you bother with him?
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