On February 3, 2017, the president signed a memorandum rolling back the implementation, by the Department of Labor, of what has been come to be known as the fiduciary rule. This rule was set to go into effect on April 17th, 2017.
Many do not know what the fiduciary rule is all about so, some background might be helpful.
Currently, if you go to someone and sign an agreement for financial advice, they may not tell you that they are making the bulk of their money from commissions on products they recommend.
Compare this to investors with substantial resources.
They usually pay their financial representatives a percentage of the amount under management (generally from 1.0 to 2.0% but it varies with volume among other things). In exchange, their representatives agree to put their client’s interests first. Not their commissions.
In those cases, the financial advisors are acting in a fiduciary capacity, in representing their client.
The real question to ask to evaluate an investment advisor is whether their agreement provides that they have a fiduciary responsibility in the relationship. That means they: are acting in your best interests, even if it is not in their best interest, avoid conflicts of interest and, are clear about their compensation.
Due to recent changes in the law, 401k plans currently are required to act as your fiduciary so, if your money is in one of them, you are safe.
But apart from them, the current state of affairs only requires that a financial advisor puts you into an investment that is suitable for your income/net worth situation and in keeping with your stated risk tolerance. That’s why they ask you all those questions about your feelings about risk . . . to provide a basis to cover themselves. There is no requirement to place you in investments that are the best for you.
So, conceivably, one investment recommended to you could be suitable for you using this “suitable” criteria, but best for them and their pocket. While another investment is not recommended or even mentioned that might be far better for you (but not for them) so it goes undisclosed.
The terms of the financial advisor relationship is usually quite a surprise to people.
Or worse, it goes totally unrealized.
And it can be an expensive surprise. Even a difference of a half percentage point in earnings can mean a huge difference in the value of your portfolio over time with compounding.
The Council of Economic Advisors has estimated that the current situation costs consumers about $17 billion a year! Guess who got a chunk of that $17 billion? Those non-fiduciary advisors.
If you want to change that situation, consider re-reading my blog from last year on investments simplified at the link below. It really isn’t that hard or that complex.
Isn’t it time you take control of your money?