After five years in the making, the DOL finally approved a new fiduciary rule that is designed to protect client retirement investment accounts by regulating investment advice from dealer-brokers. The rule has stirred up quite a bit of controversy in the financial world, as it will dramatically change the suitability standard that brokers previously operated under.
Broker-dealers are currently operating in an environment of increasingly stringent regulations and scrutiny, but with investment scams and elder retirement income financial abuse on the rise, many financial advisors and investors are siding with the Department of Labor in their decision to initiate regulations that offer greater protection for investors with retirement accounts.
If you have any of the following questions about the new rule, here is some insight into how it will work:
What is the new fiduciary rule?
The new fiduciary rule requires that financial advisors and investment brokers put the best interest of their clients first when giving investment advice for their retirement investments. Whether the advice is successful or not, it must be given in good faith and the rationale behind any trades and decision-making must be diligently recorded. Similar rules already exist to protect company-sponsored plans such as 401ks, but the new rule will also extend the higher fiduciary standard to IRA’s and 401k rollovers.
How is this beneficial for clients with retirement investment accounts?
While the new fiduciary rule doesn’t mean that clients will be entirely sheltered from bad advice, it creates a heavy burden of proof for broker-dealers. The DOL has the authority exact heavy fines and penalties upon brokers and financial advisors who give advice in violation of the rule. This translates to a better standard of care for retirement investment accounts. The U.S. is already facing a major retirement crisis when it comes to individuals saving for retirement; this new rule will ideally help to mitigate some of the devastating mistakes that are caused to investor portfolios by broker-dealers putting their own profitability first, rather than what is in the best interest of investors.
Prior to the establishment of this rule, financial advisors were required to operate under a nebulous rule called the suitability standard. This rule required only that brokers make a “suitable” recommendations for clients’ investment accounts, based on factors such as age, investing experience, needs, goals, and risk tolerance. The investment advice offered did not have to be in the client’s best interest – for example, by choosing an investment with low or no commissions – as long as the advice was “suitable. The suitability standard was thought to be a vague and insufficient means of protection for clients’ assets, since the broker was free to recommend an investment even though it paid him or her (or their firm) a higher fee or commission, which often meant less of an investment return for the client.
What does this rule mean for other types of investment accounts?
At this time, the new standards only apply to tax-sheltered retirement investment accounts, which are regulated by the DOL and account for roughly half of all retail U.S. mutual fund assets. However, this is a huge initial step for financial reform in the United States and many feel that it’s only a matter of time before the Securities and Exchange Commission follows suit and takes a stronger stance on fiduciary responsibility when it comes to securities investments in other situations where supposedly independent investment advice is given.
Partner Robert Port’s opinion on the DOL rule was quoted in this Atlanta Business Journal article:
“People who give this advice have the ability to destroy somebody’s financial future with self-serving advice. I wish it covered the financial industry as a whole, and not just the retirement accounts.”
Even when the new rules are in full effect, the United States will still lag behind many other countries when it comes to rules holding financial advisors to strictly regulated and enforced fiduciary standards. However, it is an encouraging change in the right direction, and will hopefully pave the way for larger reform initiatives that will help protect the hard-earned assets of many Americans.
