Next year, the Department of Labor is scheduled to introduce new rules regarding retirement planning. Under these rules, any financial services industry professional who makes investment recommendations to workplace retirement plan participants or IRA owners in exchange for compensation will be considered a fiduciary.1
What does that mean? It means that this person has an ethical and legal duty to provide advice that is in your best interest.1
Many investment and retirement planning professionals have reacted to the DoL’s move with “We already do that.” After all, the suitability standard – something very close to a fiduciary standard – has been in place in the financial services industry for decades, and numerous financial services professionals already serve their clients as fiduciaries.
Detractors think the new rules amount to overkill, and they argue that an-across-the-board fiduciary standard will not make a difference in the quality of retirement planning or investment advice that retirement savers receive. The legal implications of the new rules may send retirement planning fees higher, and another effect might be that fewer retirement savers have access to these services.2
So, what positive difference could a fiduciary standard make? It could lessen the potential for conflicts of interest creeping into an advisor-client relationship.
The suitability standard emerged in the brokerage industry decades ago. It guides a financial services professional to recommend only investments that are “suitable” for a particular client, given his or her age, income, goals, and net worth.
The DoL sees a shortcoming in the suitability standard. Suppose there are multiple “suitable” investments that a retirement planner could recommended to a retirement saver (a common occurrence). Under the suitability standard, what is to prevent a retirement planner from suggesting and recommending the investment that could result in the most compensation for him or her, over the others? What if the alternate investment options are never mentioned? If this sort of thing happens, is the investment recommendation being made truly one in the client’s best interest?
In theory, the installation of a wide-ranging fiduciary standard takes the potential for conflicts of interest out of retirement planning. It also encourages even more retirement planners to charge fees for services, rather than earning some or even all of their incomes from commissions.
This encouragement will likely sit well with most investors, who naturally want less potential for conflict of interest. It is also sitting well with many retirement planners. While exemptions to the rules can be made and while the rules will not apply to existing investment assets, the implementation of a broad fiduciary standard for retirement planning is good news and reduces potential dissonance in the relationship between the retirement planner and the retirement saver.1
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – money.usnews.com/money/blogs/planning-to-retire/articles/2016-04-08/the-new-retirement-account-fiduciary-standard [4/8/16]
2 – nytimes.com/2016/04/07/your-money/new-rules-for-retirement-accounts-financial-advisers.html [4/7/16]