In April, financial advisers for the first time will be required to put retirement investors’ best interests first.
But there is a catch. The new requirement, known as a fiduciary rule, was imposed by the Labor Department during the Obama administration, and could be blocked by the Trump administration or congressional action before it takes effect.
With its fate uncertain, investors can still protect their interests, by exercising vigilance, finding advisers who will act as fiduciaries, and understanding the issues involved in the first place.
“What’s been most striking to me is that when I talk to consumers, they say that they thought advisers were supposed to be working in their best interests all along,” said Linda Leitz, a fee-only certified financial planner in Colorado Springs. The reality is that many advisers are not required to act in investors’ best interests.
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That was supposed to change for retirement investors under the fiduciary rule, pushed by Thomas E. Perez, the secretary of labor, and strongly supported by Senator Elizabeth Warren, a Massachusetts Democrat.
The rule, scheduled to take effect in April, bans potential conflicts of interests for advisers in retirement accounts; a broader fiduciary rule, covering all investment accounts, has been under consideration by the Securities and Exchange Commission but has not been approved.
The fiduciary rule has opposition.
The insurance industry and Wall Street have been fighting it, and several business groups, including the U.S. Chamber of Commerce, have sued to stop it.
Republican congressional leaders have said they want to eliminate it, and Representative Joe Wilson, Republican of South Carolina, this month introduced a bill that would delay it for two years. The House of Representatives last year considered legislation to eliminate the fiduciary rule, along with most of the Dodd-Frank financial reform law.
While the rule could be postponed or eliminated, it has already caused many companies to curtail the sale of retirement mutual funds and insurance vehicles that charged high commissions and fees or were clearly unsuitable for clients. And retirement investors can still benefit from trends that have been reshaping the financial service industry for decades.
Low-expense funds that largely cut the cord with broker-advisers have become more popular. Last year, investors moved $375 billion into low-cost exchange-traded funds, according to preliminary figures from BlackRock, the investment manager.
Fund giants like BlackRock, Fidelity Investments, Vanguard Group and Charles Schwab offer low-cost funds and have been lowering expenses in recent years. The companies also offer robo-advising services or provide funds for automated platforms. Fidelity, Schwab and Vanguard also offer direct, personalized financial planning services.
The low-expense trend has been aided by the emergence of automated “robo” portfolio managers like Betterment, Personal Capital and Wealthfront, online platforms that combine low-cost portfolios of mutual- and exchange-traded mutual funds with investment advice.
The industry’s longstanding product-oriented marketing machine also is being disrupted by a more people-centered model adopted by fiduciary advisers who give specific advice on taxes, college planning or estate planning. That momentum will be difficult to stop.
“The industry is increasingly putting the person at the center of the equation,” said Tricia O. Rothschild, chief product officer for Morningstar.
“There are something like 310,000 financial advisers in the U.S. now, which is about 40,000 fewer advisers than there were 10 years ago,” she said. “The only part of the market where we’re seeing growth is from advisers moving from commission-based to more fee-based models.”
With products sold on commission, investment advisers typically have greater incentives to make decisions that are profitable for themselves and their firms.
Fee-based advisers, however, tend to have incentives to provide information that is tightly aligned with clients’ financial goals.
Combined with a greater awareness of investment expenses — billions of investor dollars have flowed into low-cost index funds — the tide continues to shift away from commission-based products.
Some 80 percent of investor funds flowed into cheap, passive mutual and exchange-traded funds in the third quarter of 2016 alone, according to Broadridge Financial Solutions, which tracks mutual fund assets.
The ranks of fee-only personal financial planners have been growing as well. Many of them are fiduciaries who eschew commissions, charge hourly or flat rates and favor low-cost passively managed investment portfolios based on traditional mutual funds or exchange-traded funds that track indexes and do not try to beat the market.
The National Association of Personal Financial Advisors, which represents fee-only financial planners, has grown to more than 2,700 members, from about 1,700 members in 2007, an increase of 60 percent.
“Napfa’s growth over the last 10 years is due to a variety of factors that include growing consumer preference for fiduciary-level advice delivered under a fee-only compensation model,” said Geoffrey Brown, the association’s chief executive.
Yet the asset management industry is still dominated by broker-advisers, who operate on a loosely defined legal standard for investment “suitability.”
Broker-advisers often cannot be sued by customers, who typically are required to use an industry-sponsored arbitration forum in a dispute. Many investors are not even familiar with what the fiduciary standard — which gives them the ability to sue advisers — means.
Even without the Labor Department’s fiduciary rule, there are ways to determine whether an adviser is likely to work in your best interest.
Many certified- and fee-only financial planners, registered investment advisers and personal financial advisers who are also certified public accountants operate under the fiduciary model.
The key question to ask an adviser is: “Are you a fiduciary?”
Next, ask how the adviser is compensated. While earning a commission is not necessarily a red flag, those who charge flat or hourly fees or a set percentage based on assets under management may have fewer conflicts.
To determine whether advisers have conflicts, ask to see their Form ADV, a government disclosure form about their sources of compensation, which they must provide on request.
Consider your needs. If you need pre-retirement or estate planning, or divorce or retirement advice, you may want specialists in those areas.
Looking for a comprehensive, soup-to-nuts financial plan? Then a certified financial planner may be the right person.
You can always combine an automated service such as a robo-adviser for portfolio management with an adviser who can provide customized advice on estate plans, retirement income and college planning.
In any case, it is wise to find out whether the advice you receive is really intended to benefit you.