Fiduciary rule means better money advice

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Ken Heise

In a Harris Poll conducted in March on behalf of Personal Capital, a digital wealth management firm, 46 percent of respondents said they believed all financial professionals are legally required to always act in their clients’ best interest. Another 31 percent were unsure whether this was the case.

Imagine those individuals’ surprise (and maybe yours), in the coming weeks and months as their financial professionals tell them that, uh, no, that wasn’t quite the case before — but it is now, and they can’t wait to be transparent about transactions, compensation, and conflicts of interest when discussing retirement plans.

In other words, since the U.S. Dept. of Labor started implementing its new fiduciary rule this summer, you shouldn’t be getting sales pitches disguised as advice anymore. When it comes to managing your retirement accounts (those funded with pre-tax money, such as your 401(k), SEP plans and IRAs), your financial professional will be ethically and legally bound to focus more on your success than his own.

Fiduciaries vs. salesmen

This level of responsibility is nothing new — it dates back to an 1830 court ruling and the formulation of a “prudent person standard of care,” which requires someone acting as a fiduciary to do what a prudent person would do and to not take advantage of a client.

Congress also has drawn distinctions between broker-dealers, who were regulated as salesmen under the Securities Exchange Act of 1934 (not under the fiduciary standard), and Investment Adviser representatives, who were regulated under the Investment Advisers Act of 1940. And yet, somehow these distinctions have become blurred over the years.

Most financial professionals have been working under the less rigorous “suitability” standard, which requires only that they recommend products that meet a client’s financial objectives.

The products they offer don’t have to be the best or least expensive option. They may be licensed to sell stocks, bonds, mutual funds or insurance products, but not to give investment advice.

And their clients might never have known it.

It’s kind of shocking that we’ve gone so long without exposing the difference — or raising expectations. Instead, we’ve put the burden on the individual to figure it out.

But the world of finance just keeps getting more complicated. With employer pensions going away, putting retirees largely in charge of their own future financial security, people need help. And they need to be able to trust that it’s good help.

Get the most out of new rule

How can you use the changes required by the fiduciary rule to your advantage?

• Get a second opinion from a licensed professional who is held to the fiduciary standard. A licensed fiduciary is an adviser who has passed and acquired a Series 65 or 66 designation. Most professionals will review your assets and meet with you at least once without obligation.

Make the most of that opportunity. I often find that prospective clients are unaware of the amount of risk in their portfolios. They’re also unsure about the fees they’re paying to their financial professional and for the products they recommend. We can clear all of that up pretty quickly.

• Ask questions. If your guy was a suitability salesman a few weeks ago and now he’s acting as fiduciary, ask him how that will affect his recommendations and, if he’s making changes to comply with the new ruling, why he didn’t have you in the best-interests scenario from the start?

• Get educated. The new rule covers retirement advice only, so make sure you know when your financial professional is acting as a fiduciary and when he isn’t. Read the disclosures you receive and pay attention to any red flags. For non-IRA assets, anyone without a Series 65 or 66 designation does not have to abide or comply by fiduciary standards.

• Be flexible. A professional truly held to the fiduciary standard will tailor a plan just for you and your individual needs. Unlike, for example, a broker — who may be limited to what his firm wants him to sell — a fiduciary will go over many different products and strategies, because he can.

Be vigilant — it’s your money — but keep an open mind to the suggestions you hear.

© The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.