- What does the new Department of Labor rule mean to me?
- What is a fiduciary?
- Why is the Department of Labor involved?
On April 6th, the Department of Labor (DoL) announced the final adoption of its Conflict of Interest Rule pertaining to retirement investment advice. At a high level, the rule states that financial advisors, whether they’re brokers or registered investment advisors (RIAs), must always act in a client’s best interest when providing retirement investment advice to them. Firms must also discontinue financial incentives that allow advisors to put their own financial gain ahead of their clients’ best interests. The new conflict of interest rule will be implemented in phases with initial compliance not required until April 2017. That means savers and investors need to remain vigilant for at least another year or so.
What is a Fiduciary?
The Legal Information Institute of the Cornell University Law School defines a fiduciary as: a party owing a duty to act solely in another party’s interests. A fiduciary duty is the strictest duty of care recognized by the US legal system. When I first learned about this new rule, I asked myself why we even need a rule to force advisors to act in the best interest of their clients? Isn’t that a core principal of working with clients? Either it’s in your DNA or it’s not, right?
Why do I care?
Many advisers do put their clients’ best interests first. They are hard working men and women who truly became advisors in order to help families achieve a secure retirement. As with all professions, however, there are always a few bad actors, and it remains hard for consumers to know exactly whom to trust. Independent research from the President’s Council of Economic Advisors suggests that conflicts of interest have cost middle class families billions of dollars per year.
Why the DoL?
The Labor Department is responsible for ensuring that the retirement savings vehicles used by America’s workers, including traditional pensions, 401(k) plans and other employer-sponsored retirement plans are secure and operated in accordance with federal pension laws and regulations. This includes setting rules that govern conflicts of interest both for IRAs and for employment-based plans.
Retirement savings are supposed to receive special protections under federal retirement and employee benefits law. However, the regulations underlying these laws about retirement advice have not been updated in more than four decades. When the Employee Retirement Income Security Act of 1974 (ERISA) was first passed, professional pension managers typically were the ones making complex decisions about retirement investing. But, there has been a dramatic shift in our retirement system since the 1970s. As pensions become less common, especially for those not employed in the government and not-for-profit sector, today’s workers are largely responsible for managing their own savings through IRAs, 401(k)s and other employer-sponsored retirement plan. So, millions of Americans rightfully turn to advisers for recommendations about how much to save and how to invest and manage those savings.
But under these outdated rules, savers cannot assume that the retirement investment advice they receive from advisors is always in their best interests. That’s because many advisers have not been required historically to abide by what is called a “fiduciary standard.” In other words, longstanding rules permitted some types of financial advisers to put their personal bottom lines ahead of their clients’ retirement security if they chose to do so.
Research is a great way to combat advisors who do not act in a fiduciary capacity. You should always understand what you are investing in, and if you don’t completely comprehend an investment option, don’t put your hard-earned money into it. Also make sure you understand the costs of the investments an advisor is recommending to you, and when in doubt, seek second opinions from other advisors as well as from your accountant. If you have any questions about whether your advisor is acting in your best interests, please don’t hesitate to contact us (610.695.8070).