Thanks to the Department of Labor’s new "fiduciary" rule, which went into effect this week, you are finally legally entitled to retirement investment advice that serves your best interests, regardless of who provides that advice or how they choose to pay for it.
The rule requires all financial advisers, including broker-dealers and insurance agents, to act in their customers’ best interest rather than their own, charge reasonable fees and refrain from making misleading statements.
So what does that mean for you?
If you previously received advice from a non-fiduciary adviser, here are some of the key changes you can expect.
1. You should see new, more investor-friendly investment options recommended in your IRA.
In order to meet the best interest standard, your adviser may recommend new and different types of shares of mutual funds, such as "T" shares, that were introduced in response to the rule. These new shares can cut several percentage points off the sales charges you pay to purchase those funds. That’s money that will stay in your individual retirement account rather than going to pay your financial adviser.
Or your adviser may offer new "clean" shares, which allow you to negotiate how much they get paid for the services they provide in selling you that fund.
Mutual fund investors aren’t the only ones who’ll see benefits from the rule. Annuities also have been given a tune-up. New annuities with more investor-friendly features, including much shorter surrender periods and lower fees, have been introduced in response to the rule.
2. You should get a better deal if you roll over money from your workplace retirement account.
The new conflict of interest rule only allows rollover recommendations—recommendations to move money out of your workplace plan and into an IRA—if the move is in your best interest. One possibility is that you will see fewer rollover recommendations once the rule takes effect, but firms may also respond by offering retirement savers a better deal on their rollover investments.
If your adviser recommends you roll money out of a company 401(k) plan and into an IRA, ask on what basis she determined that you would be better off in the IRA. Ask in particular how your costs will compare. While costs shouldn’t be your only consideration, minimizing costs is one of the surest ways investors have of improving their long-term investment performance.
3. You may be encouraged to move your money to a fee account.
Some firms have concluded that the easiest, cleanest way to minimize conflicts is by moving clients from commission accounts to accounts where investors pay a fee for advice. That can take the form of a flat fee, hourly fee or a percentage of assets under management.
Fee accounts can offer a good deal for investors, assuming the fees are reasonable and the investor wants and benefits from the ongoing advice offered with such accounts. If your adviser suggests moving from a commission account to a fee account, ask on what basis she determined you’d be better off in a fee account. In particular, ask how your costs in the fee account would compare to the costs you previously paid in your commission account.
If your costs would go up, ask what additional services you will receive to justify those higher costs and determine whether those are services you want or need. Don’t be afraid to try to negotiate a lower fee. Some firms reportedly have been willing to lower fees to match average commission costs from previous years in order to demonstrate that the fee account really is in the customer’s best interests.
What if your adviser drops your account?
While most firms have moved forward in good faith to implement the rule in an investor-friendly fashion, others have been more resistant. Some, for example, have threatened to drop smaller retirement accounts rather than serve them under a best-interest standard.
What should you do if this happens to you? Take a moment to count your lucky stars. A firm that will only "advise" you if it can profit unfairly at your expense is not where you want to keep your money. There are many firms willing to serve even the smallest accounts under the new standard and at a reasonable cost.
Once you find such an adviser, have them do a careful review of your existing investments. Chances are your money is in investments that pay generous compensation to the seller, but charge high fees to the investor or expose you to inappropriate and unnecessary risks.
In these circumstances, the long-term benefit to your retirement savings from switching advisers—tens or even hundreds of thousands in added savings once your reach retirement—should greatly outweigh any temporary inconvenience of moving accounts.
One last word of caution.
Remember, the rule only applies to retirement accounts. If you have been working with a non-fiduciary adviser, such as a broker-dealer or insurance agent, you’ll likely continue to get suitable sales recommendations rather than best-interest advice in your non-retirement accounts.
If that doesn’t appeal to you, remember—there are lots of firms that are eager to serve even the smallest accounts under a fiduciary standard. Maybe it’s time to find one.
Barbara Roper is the director of investor protection at the Consumer Federation of America.