Here's a proposition to you -- how would you like to work with a financial advisor who doesn't have to work in your best interest, and is able to increase his or her profitability by steering you towards retirement investment products that have hidden payments to the advisor, contain fees that are concealed from you, and under-perform other less expensive choices?
No? How about a relationship in which your financial advisor is legally required to act in your best interest, has to fully disclose how he or she is being compensated, and must place your interests before their own?
This last choice recently suffered a slow and painful death under the Trump administration. It is called the Fiduciary Rule, which was approved under Obama, and was supposed to be implemented in April 2017. It demanded that retirement advisors act in the best interests of their clients, and put their clients' interests above their own. It left no room for advisors to conceal conflicts of interest, and stated that all fees and commissions for retirement plans and retirement planning advice be clearly disclosed in dollar form to clients.
Wall Street banks and brokerage firms fought it from the beginning, because it limited commissions and protected consumers from high-risk investment products. They longed for the good old days, which the Council of Economic Advisors (CEA) described as "A system where Wall Street firms benefit from backdoor payments and hidden fees if they talk responsible Americans into buying bad retirement investments -- with high costs and low returns -- instead of recommending quality investments." ¹ The CEA report found that the abuses cost working and middle-class families $17 billion per year in losses.
In a height of cynicism, the Wall Street firms argued that the Fiduciary Rule would prevent brokers and annuity agents from giving advice to their clients, at the same time maintaining that the same brokers and annuity agents are actually salespeople who are not obligated to have a relationship of trust with their clients.
One of the first things that Trump did after taking office was to call the Fiduciary Rule into question, and delay its implementation for 180 days, giving Wall Street additional time to wield its wealth and power to lobby Congress. Then in June, a U.S. District Court threw out the Fiduciary Rule. The Consumer Federation of America called it "a terrible day for retirement savers."
What can you do now to protect yourself? First, sort through all the alphabet soup. There are many designations used by financial salespeople that sound impressive, like financial consultant, wealth manager, vice president, financial planner, financial advisor, and many more. Some designations only require that the salesperson sit though a one-day course. Check out a potential advisor's background, and find out what their credentials mean.
A Certified Financial Planner™ has to serve as a fiduciary when doing financial planning in order to maintain the certification. A CPA is also required to act as a fiduciary to retain the license. A firm that is a Registered Investment Advisor (RIA) must also act as a fiduciary.
Even if an advisor is a fiduciary, it makes a difference where they work. The firm that the fiduciary works for may restrict what investments he or she can pick from. An independent Registered Investment Advisor can choose from the whole universe of investment products, including low-cost mutual funds and exchange-traded funds. However, fiduciaries who work for some brokerage firms or banks must select their recommendations from house funds or lucrative mutual fund partners that are more profitable to the firm.
Don't be afraid to ask a lot of questions. If what the salesperson is pushing sounds too good to be true, it very often is. Ask how much the advisor gets paid, how they get paid, and what the various fees mean. Ask if he or she is legally obligated to act in your best interest, as a fiduciary. And then ask them to put it in writing.
¹ Forbes 7/20/2018
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