Teresa McUsic

New rule for financial advisers could make your retirement savings safer

A new federal rule will require broker/dealers to follow a fiduciary standard that requires they put client interests ahead of their own.
A new federal rule will require broker/dealers to follow a fiduciary standard that requires they put client interests ahead of their own. TNS

Is your financial adviser looking after your best interests?

Hopefully the answer is yes, all the time. But a new rule issued by the Department of Labor this month wants that spelled out for all advisers, specifically regarding retirement savings.

Financial planners are calling the move a milestone in requiring particularly broker/dealers to move from a “suitability” standard to a “fiduciary” one. A fiduciary standard means advisers must put clients’ interests above their own.

The distinction is an important one, said Harold Evensky, a fee-only certified financial planner with Evensky & Katz and a professor at Texas Tech who has pushed the new rule with other planners for years.

“The DOL needed to take action,” he said. “There are trillions of dollars in pension plans and that is money that will be rolling out as people retire, to IRA assets, where there are no protections except for the suitability standard. This is a large percentage of the retirement money of America. DOL needed to protect the public.”

The new rule, which will begin to be implemented next year and will be completely in place by 2018, will be a “staggering” change for the brokerage industry, Evensky said.

“Brokerage standard rules are a check-off of boxes,” he said. “But the fiduciary rule’s underlying principles are pretty hazy. This will be a massive philosophical change that will turn the industry upside down.”

The rule is “a huge win for consumers,” Micah Hauptman, financial services counsel for the Consumer Federation of America, said in a statement.

“It appears that the rule properly closes the loopholes in the current rule so that financial professionals can no longer evade their obligation to serve their customers’ best interest,” he said.

By focusing on retirement accounts, the rule adds protections when savers have the most money at stake and are the most vulnerable to being preyed upon, Hauptman said.

The rule also has “a strong, legally enforceable best-interest standard backed by requirements for firms to rein in toxic and often perverse compensation practices that reward financial professionals for working against their customers’ best interests,” he said.

At the heart of the issue is transparency of any cost of investments in the form of commissions, vacation packages and other types of compensation, said Helen Stephens, a fee-only certified financial planner with Aspen Wealth Management in Fort Worth.

“We see people coming in all the time who don’t know what they’re paying for their investments,” she said. “But it’s your money and you need to know what you’re compensating a professional for and how they’re coming up with their recommendations. Was it based on your best interest or a trip to Fiji for them for the deal of the day?”

Registered investment advisers, regulated based on size by either the state securities department or the Securities and Exchange Commission, already take a fiduciary oath, Stephens said.

In addition to brokers, investment firms will have to change how they operate, said Fred Gartrell, a fee and commission chartered retirement planning counselor in Fort Worth with Robert W. Baird & Co.

“Firms who simply dabbled in financial planning will have to make a paradigm shift in how they operate and how they incentivize their brokers and advisers,” he said.

The days of simply recommending a stock or other investment without looking at the entire financial picture of the client will soon be gone, at least when using retirement money.

“I have always believed in constructing a financial plan before recommending any kind of investment,” Gartrell said. “How can an adviser recommend any product or service without first understanding the goals and objectives of the client?”

The SEC also is working on its own fiduciary rule that would expand the Labor Department’s rule to all types of accounts, not just retirement. The commission is expected to have a proposed rule before the end of the year.

Meanwhile, some moves are afoot in Congress to block the rule, said Doug Harbrecht, new media director for Kiplinger.

“There are some efforts in Congress to block this, but it’s hard for me to understand the arguments on the other side,” he said. “Regulators are trying to get financial advisers to do what you would expect them to do — be honest, act in your best interest, account for putting in fees or commissions.”

Teresa McUsic’s column appears Saturdays. TMcUsic@SavvyConsumer.net

Picking an investment adviser

  • Always work with a registered investment adviser.
  • Consider an adviser who charges an hourly fee or a percentage of your assets. Fee-only advisers can be found at the National Association of Personal Financial advisers at www.napfa.org.
  • Do a background check on your adviser with regulators. For registered investment advisers, check the SEC at www.SEC.gov or the Texas State Securities Board at www.ssb.texas.gov; for brokers go to the Financial Industry Regulatory Authority at www.finra.org.
  • Have a direct conversation about fees and conflicts of interest with your adviser.
  • Ask the adviser to sign a pledge designed by the Committee for the Fiduciary Standard that simply states: “I believe in placing your best interests first. Therefore, I am proud to commit to the following five principles: I will always put your best interests first. I will act with prudence; that is, with the skill, care, diligence and good judgment of a professional. I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts. I will avoid conflicts of interest. I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.”