New "Fiduciary Rule" for Retirement Accounts

Last week, the Department of Labor (DOL) issued a rule change that imposes higher standards on brokers and other commission-based investment advisors in an attempt to reduce conflicts of interest.   The DOL, which overseas retirement accounts such as 401(k) plans and IRAs, issued the new regulations after six years of debate.  These regulations impose fiduciary responsibility on anyone giving advice regarding retirement accounts and are supported by the CFP Board, the National Association of Personal Financial Advisors (NAPFA) and the Financial Planning Association (FPA).  The fiduciary standard says that advisors must put the interests of the client ahead of their own. 

Proponents of the fiduciary standard believe that consumers need protection from advisors selling unsuitable financial products to prevent further erosion of their retirement portfolios.    Not surprisingly, the brokerage industry has been fighting this effort using its considerable political and economic clout.   It has argued that the move to fiduciary responsibility would force brokers to stop serving small investors and discontinue IRA sales.   This of course is hogwash as brokers are not going to abandon this lucrative market. Besides, small investors can get competent financial advice from 401(k) administrators, hourly-based planners like the Garrett Planning Network, and low-cost investment platforms like Vanguard. 

There will be a lot of analysis to follow as both sides digest the 1,000 page ruling and the labyrinth of arcane laws regulating retirement investments.  The SEC is likely to make similar changes for investment advice outside of retirement accounts.  The stakes are high and the battle will continue in courtrooms and on Capitol Hill.   Lawmakers are undergoing intense lobbying efforts and I would not be surprised if they intercede to neutralize the new law.    Brokers will no doubt seek creative ways to circumvent the rules. 

I have the feeling that both sides gave a huge sigh of relief at the announcement.  The brokerage industry feared that it could have been worse for them.  Even though some concessions were made which diluted the original proposal, supporters of conflict-free advice see this as a great step in the right direction.  These new regulations won’t even be fully implemented until January 1, 2018.

The new fiduciary rule will curb some unscrupulous practices, but it would be a “fantasy” to think this will truly put advisors on the same side as the clients.  While I agree that it needed to be done, I’m not confident that it will stop many of the abuses that I see on a daily basis.   For too long, the industry has operated under the philosophy of the outlaw character, Calvera, from the 1960 western The Magnificent Seven, where he stated “If God did not want them sheared, he would not have made them sheep.”   I don’t see the industry attitude changing anytime soon. 

Since opening my business, I have been a fiduciary advisor by both law and by practice.  I’m not directly affected by the change.   One major benefit, though, is that the debate has brought a great deal of attention to the topic.   More and more people are starting to understand what the term “fiduciary” means and are beginning to demand an advisor who adheres to the higher standard of responsibility.  

Despite the new regulations designed to protect retirement account investors, the deck remains stacked against them.  You must be vigilant and protect yourself.   Don’t rely on any government agency to make investment advice fair and affordable.     It’s not likely to happen.  Like the computer says in the movie War Games, “The only winning move is not to play.”   My advice is to continue to save and invest, but play “the game” on your own terms.   There are plenty of great resources available, and ways to get independent advice if you are willing to look.