The Department of Labor released their long-awaited fiduciary rule in April. This requires financial advisers to act in the best interests of their clients, but only when dealing with IRAs, 401(k)s, and other qualified accounts. Those in favor of the rule say it will protect middle-class investors from high-fee products sold to them by brokers who are more interested in lining their own pockets than in serving their clients’ best interests. Those opposed to the rule claim it will make investment advice much more expensive to provide and raise regulatory costs.
Wall Street vehemently opposed this rule, preferring instead to continue putting their own interests before those of their clients. They claimed the new rule would cost them too much and make advice more expensive for their clients. Translation: It will cost them billions in lost revenue because they aren’t as easily able to sell high fee products to their clients anymore. And the reason it will increase the cost of advice they give to their clients is because they’ll have to make up for this revenue shortfall by charging their clients higher management fees.
The high cost of conflicted advice
Conflicted advice, or advice that is dependent on a commission and other incentives paid to the selling broker, costs investors $17 billion annually in the aggregate, according to the White House. In addition, conflicted advice leads to investment returns that are 1% less on average than non-conflicted advice. The DOL’s fiduciary rule was in part established to help reduce the amount of conflicted advice offered, and is a step in the right direction for retirement account investors.
Even though this rule is a win for retirement investors, it’s still a watered down version of the original fiduciary rule floated by the DOL. Brokers are still able to sell proprietary products, variable annuities, and other high commission products to retirement investors, which is disappointing. And unfortunately for retirement investors, some parts of this new rule don’t even take effect until January 2018.
The biggest impact for our clients
If you have a 401(k) account that you want to roll over to an IRA, whichever advisor you choose should present you with a side-by-side cost comparison showing you the differences between leaving your money in the 401(k) plan versus rolling it over into an IRA. The comparison should show the fees associated with the investments in the 401(k) as well as the fees of both the funds the advisor will be using plus the advisor’s management fee. This will help you to understand what you’re getting and what you’re paying.
The bottom line is that P&A has been held to a fiduciary standard and has been putting our clients’ interests first for 21 years, not just in dealing with retirement accounts, but all accounts at all times. As a result, the impact of the new DOL fiduciary rule on our business is minor. However, the impact on many advisory firms operating under different business models than our own may be dramatic. If you’re not yet a client and are interested in learning more about the fee-only business model of P&A, please contact us.