How will the new ‘fiduciary’ requirement for retirement planners affect you?

Here are some questions you should ask your advisor

Now that the U.S. Department of Labor has finalized its rule requiring financial planners who help clients save for retirement to meet fiduciary standards, consumers’ relationship with these professionals will change.

But how? Stephen Kates, principal financial analyst for Annuity.org, see the changes affecting savers two main ways.

“Right now, a fee-only financial advisor working with a client on an on-going basis is acting as a fiduciary, but a broker advising a client on whether to rollover their 401(k) to an IRA is not,” Kates told ConsumerAffairs.  

“An insurance professional selling annuities is not required to take a holistic view of a consumer’s entire financial picture during the transaction.”

But once the new rule takes effect, they will. In drafting the rule, federal officials claimed that some retirement planners steered clients into instruments that paid them a commission. A fiduciary advisor is one who is being paid to provide the best, objective investment advice, based on the individual.

Everyone will be a fiduciary now

“These interactions will change, and all these professionals will be required to act in a fiduciary standard,” Kates said. “This will be beneficial to consumers because they will not have to worry about one type of advisor acting with a different standard of care than another. Simply, more conversations and advice will be covered under the fiduciary standard.”

But there may also be a downside. Kates says it's possible the new rule will reduce some consumers' ability to receive advice because it probably will come with a fee. Financial planners have to earn money somewhere and if they aren’t getting commissions then they are likely to charge a fee for their advice, just as an attorney does.

“The additional compliance burden that this places on advisors of all kinds will mean that many lower income and less wealthy consumers may no longer meet the threshold for the work required,” Kates said. “Independent professionals without support or back-office teams will be the most impacted.”

Generic and formulaic advice

He says the “free” advice may become more generic and formulaic. It could, he says, price less wealthy savers out of the system. That, of course, assumes the final rule takes effect. Kates says November’s election could derail it.

Even if the new rule does take effect, Kates says the questions consumers should ask any financial professional remain the same. Here are his suggested questions: 

  • How are you compensated in our relationship?  If you are compensated on product sales or money movement, explain to me how that will impact your decisions when giving advice. 

  • How have you helped people like me in the past, and how many clients do you work with on an on-going basis?

  • What kind of financial services do you offer or not offer?  

  • What information do you need to offer me the best advice possible?  

  • What are the alternatives to [proposal] and how and why would the results be different? 

Kates says you can use SEC.gov or FINRA.org to research the companies and individuals you are working with to verify their credentials and experience.  The ConsumerAffairs research team can also help.

They analyzed 12 national firms providing retirement planning advice as selected the four best. You’ll find their report here.

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