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Things You Should Know About the Fiduciary Rule

On March 15, 2018, the Fifth Circuit Court of Appeals ruled that the United States Labor Department acted outside of its authority by creating the fiduciary rule and no longer has the authority to enforce this Obama-era protection for retirement savers.

The fiduciary rule required financial advisors to act solely in their clients’ best interest as it related to investments into retirement accounts such as 401(k) and IRAs. Practically speaking, this required financial advisors to disclose all fees and commissions, in easy to understand form, that they would earn from your investments and would prevent them from concealing any conflicts of interest. For instance, without this rule in place, financial advisors could take two similar funds, and invest your money in the one that has the higher commission payout for them, thus creating higher revenue for the advisor but hurting the client’s portfolio in the long run due to a higher fee charge.

Now that financial advisors no longer are legally bound to meet the fiduciary standard, they are instead beholden to something known as the “suitability standard.” “Suitability” means that investment advisors are legally required to find investments that are “suitable” for meeting the client’s investment needs and objectives, not necessarily what would best meet their needs and objectives.

How Can I Protect Myself from Advisors who may not have My Best Interests in Mind?

Even though financial advisors are no longer legally bound to act as a fiduciary, for many firms, this has already become an industry standard. Here are several ways to ensure your advisor is acting in your best interest:

Ask them, “What can you do for me?”

Clearly state your investment objectives and ask how they will help you meet your goals. For example, you may want to have a million-dollar-plus nest egg when you retire or you may want to save less now so that you have more money to spend doing things you enjoy.  Perhaps you want to take on more risk with the hopes of a higher return. Regardless, ensure that your advisor has a solid plan for getting you to wherever you want to be.

Ask if they are a fiduciary, and require an answer in writing

Requiring a statement in writing that your advisor will act as a fiduciary on your behalf is perhaps one of the most important steps you can take to protect your retirement savings. This will ensure that you know your advisor is picking investments that are best for you and that there are no conflicts of interest such as higher commission fees or a special bonus they receive for selling you a product.