You may have noticed that the Department of Labor (DoL) has made headlines recently regarding retirement accounts. It has issued a finalized rule requiring the brokerage industry to abide by the same fiduciary standard as RIAs in investing clients’ retirement accounts. The fiduciary standard consists of a duty of loyalty and care, and simply means that the advisor must act in the best in interest of his or her client. Additionally, firms may no longer provide financial incentives for advisers to act against the client’s best interest. We have received questions about what this ruling does and doesn’t do.
- This ruling doesn’t change the way PIN does business since we have always abided by the required “fiduciary standard.”
- For retirement accounts held elsewhere, financial advisers have until April 2017 before they will be legally required to abide by the fiduciary standard.
- For accounts with advisers who do not abide by the fiduciary standard as PIN does, the new rules only obligate advisers to abide by the higher standard on retirement plans, while non-retirement accounts continue to run the risk of conflicts of interest, unreasonable compensation, and the use of a brokerage firm’s proprietary product.
Our clients often hear us refer to the fact that we live by the “fiduciary” standard, which means we make investment decisions for our clients based on what is in their best interest, not based on maximizing our income. Alternatively, brokers follow the “suitability” standard, which allows financial advisers to recommend high-commission products such as sales loaded mutual funds, non-publicly traded REITs, limited partnerships, proprietary products, annuities and other insurance products as long as they are “suitable” for the client. These products often have onerous surrender charges for many years (to cover the excessive commissions, much of which is paid to the financial adviser for selling those products); we seriously question whether these high-commission products are in the clients’ best interest.
- Do a FINRA.org BrokerCheck to see if your/their adviser has a clean ethical record and is licensed as a Registered Investment Adviser (RIA). RIAs must abide by the fiduciary standard on all accounts by law, not just retirement accounts.
- Check any recommended investments by researching the investments on Morningstar.com. Key points to consider are:
–Are you being presented a lower expense share class? Within most mutual funds there are several classes of shares, while the investments are exactly the same, the performance is a direct result of the expenses you are paying. Some share classes have much higher expenses, including higher commissions to the adviser.Check the performance of the funds against their benchmarks to see if they are in the top quartiles. If a below-average performer is recommended to you, there is reason for concern.
–Do not accept any proprietary product unless there is evidence that it is among the top in its category.
Not only do we at PIN follow this fiduciary standard when giving retirement investment advice, we follow it when giving all investment advice.
We thought you might be interested in reading two paragraphs from the Department of Labor’s Fact Sheet.
The changes in the retirement landscape over the last 40 years have increased the importance of sound investment advice for workers and their families. While many advisers do act in their customers’ best interest, not everyone is legally obligated to do so. Many investment professionals, consultants, brokers, insurance agents and other advisers operate within compensation structures that are misaligned with their customers’ interests and often create strong incentives to steer customers into particular investment products. These conflicts of interest do not always have to be disclosed and advisers have limited liability under federal pension law for any harms resulting from the advice they provide to plan sponsors and retirement investors. These harms include the loss of billions of dollars a year for retirement investors in the form of eroded plan and IRA investment results, often after rollovers out of ERISA-protected plans and into IRAs.
The Department’s conflict of interest final rule and related exemptions will protect investors by requiring all who provide retirement investment advice to plans and IRAs to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits. This final rulemaking fulfills the Department’s mission to protect, educate, and empower retirement investors as they face important choices in saving for retirement in their IRAs and employee benefit plans.
Click here to view the entire Fact Sheet.
Since the rule is 1,000+ pages long and was just issued in April, there are still many questions to be answered. As more details are analyzed, we’ll provide updates that may be of interest to you.
Thank you for the privilege of serving you; if you have friends or family who have questions about whether their accounts are being managed under the fiduciary standard, we are happy to provide a complimentary review of their accounts, whether they are being managed by PIN or another adviser.
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