Confused by the new fiduciary rule? You’re not alone
WASHINGTON — Despite a lot of pushback from some financial-services companies, a new rule should cut down on conflicts of interest in the advice given to investors about their retirement accounts.
But based on what I’m hearing from readers, people have a lot to learn about the Labor Department’s fiduciary rule, which requires financial professionals to put their clients’ interest first. To help sort through some of the confusion that often comes when new rules go into effect, Barbara Roper, director of investor protection for the Consumer Federation of America (CFA), has been helping me respond to reader queries. Here are some of her answers to questions she couldn’t get to during a recent online discussion.
Q: Financial services companies say they oppose the rule because they are looking out for small investors who, according to the firms, won’t be able to get adequate investment advice under the new rule. Since when does this industry care about the little guy?
Roper: Industry-rule opponents hit on this argument because it sounds a lot better than admitting that you just really don’t want to be legally accountable for acting in customers’ best interests. We [at the CFA] believe small investors, who are most likely to get investment advice from brokers and insurance agents who have not previously been held to a fiduciary standard, will be the biggest beneficiaries of the rule. They will no longer have to give up their right to bestinterest advice.
Q: Does “in my best interest” always mean the least expensive option, or is there some other criteria that an adviser uses?
Roper: While minimizing costs is important, the lowest-cost option is not always the best option, and the [Labor Department] rule does not require advisers to recommend the least expensive investment. Instead, they are required to consider a wide range of factors — things like the investment’s risk profile, liquidity, performance history, compatibility with the investor’s risk tolerance and investment goals.
Q: In light of the new rule, should I be keeping all my previous commissionedbased products? Is it OK to ask my adviser to prove that these products are in my family’s best financial interest? If so, what do I ask?
Roper: The rule offers an excellent reason to initiate a conversation with your adviser about the advice you have received in the past, and will continue to receive in non-retirement accounts, that has not been governed by the fiduciary standard. That doesn’t mean you should run out and dump your commission products.
It is absolutely appropriate for you to ask your adviser to describe whether and how your current holdings meet a best-interest standard. Follow up by asking more specifically whether there are other options available that would be better for you — with lower costs, a better performance record, greater liquidity or other more investor-friendly features — and why they didn’t recommend those.