On Wednesday, April 6, the U.S. Department of Labor finalized what they’re calling the “rule to address conflicts of interest in retirement advice.” Many advisors have been concerned about what the rules would actually entail, and how it might affect their business models. According to a survey of 485 financial advisors conducted by Fidelity, 73% are concerned the rule will have a negative impact on the way they do business.
In short, the rule states that any advisor/broker that handles retirement accounts must adhere to the fiduciary standard (to note: WrapManager already adheres to the fiduciary standard, so we do not anticipate any significant changes to how we operate). That means that no matter what the product involved—stocks, annuities, mutual funds, separately managed accounts, or commission products—the advisor must by law put the client’s best interests ahead of their own. Before the law, certain brokers and types of advisors could recommend a product as long as it was “suitable” for their clients.
What Does This Mean for Investors?
For one, the new rule only applies to retirement accounts, so any taxable assets/investments you have would not fall under this rule. For retirement accounts, like rollovers for instance, a financial advisor must provide impartial advice in their client's best interests, and the advisor cannot accept any payments creating conflicts of interest—unless they qualify for an exemption assuring that the customer is protected in some way. Investment decisions that fall under the rule can include, but are not limited to, what assets to purchase or sell, and whether to rollover from an employer-based plan to an IRA.
To be sure, this does not mean that advisors can no longer sell commissioned products, like variable or index annuities. But to do so, in most cases advisors will have to obtain a form known as the ‘Best Interest Contract Exemption’ (BICE), and have it be signed by the client and the advisor’s firm.
A White House Council of Economic Advisers analysis found that conflicts of interest that arise from an advisor being able to recommend proprietary products (or other products recommended for the sake of commissions versus the best interest of a client) result in annual losses of about 1 percentage point for affected investors—or about $17 billion per year in total. Perhaps the new law will change that going forward.
Moving Forward: What Investors Should Look Out For
The rule changes don’t take effect in their entirely until January 1, 2018, so retirees should not expect to see much change—if any at all—in how your retirement accounts are handled. If you're shopping for a new financial advisor, ask them if they are held to a Fiduciary Standard. It's one of the many recommendations we offer in our Guide to Finding a Better Financial Advisor. In response to the rule, however, many advisory firms are considering re-evaluating their service models and what products they offer to clients. In all, the new rule is expected to continue shaping the advisory business away from the commission-based model, and more towards the fee-only model.
At WrapManager, we already adhere to the fiduciary standard, meaning we put our client’s interests before our own. Our advice to retirees is to ask your current advisor if they already adhere to the fiduciary standard, and if they don’t, you should ask why.
If you have any questions, please give us a call today at 1-800-541-7774 or send us a note to wealth@wrapmanager.com.
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Source:
2. FA Magazine
