(Usual disclaimer: I’m an investor, not a financial advisor. Consult your own financial advisor before making any investment decisions).

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Why I Have a Funny Look on My Face

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You've probably seen me write the above disclaimer about "financial advisors" many times. What you probably don't know is that every time I do, I cringe. I have to write it because of the current US legal and regulatory environment. And yet, in my opinion, it's extremely misleading.

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Don't get me wrong. I'm not at all against the part about you getting professional, personalized advice that protects your best interests. I think that's really important.

 

What I cringe at is the implication that you get that from any registered financial advisor off the street. That's completely untrue. The vast majority have no fiduciary duty (a duty to act in your best interests).

 

And worse, many are actually incentivized to act against your interests, because they make the most money by putting you into the investments that generate the highest fees for themselves. Almost always these are the worst investments for you.  As a result, Americans lose a jaw-dropping $17 billion in retirement savings each year in unnecessary commissions and fees. (And much, much more when all savings are taken into account).

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"But I TOLD You I Was Going to Rip You Off!"

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Many advisors would argue that the current system is just fine. They claim that the blatant conflict of interest is not a problem because it's fully disclosed to us.

 

I can't help but notice that "full disclosure" is usually in the form of small-type and intentionally opaque legalese that few people read and even fewer understand. And if it actually worked, I don't believe Americans would continue to get ripped off year after year. In my opinion the situation is legalized, institutional theft.

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In 2010 the President and the Department of Labor proposed a new rule that would force financial advisors to act only in their client's best interest. This isn't a radical idea and is already common practice for attorneys.

 

However, the financial industry furiously lobbied their politicians to fight the change. They came up with a brilliant two-part argument that had bipartisan appeal. They claimed that the rule change was regulatory overreach and would take away access to financial advice from middle and lower income people. (In reality this falls under the DOL's jurisdiction, and the only advice being "taken away" was against the best interests of those being "protected"). Unfortunately, this ploy worked. Politicians on both sides of the aisle cooperated to kill the rule.

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So the Department of Labor tried again in 2015 with a stripped down version that only required fiduciary responsibility for retirement accounts. They hoped it would be much harder to argue that it's okay for financial advisors to put grandma into investments against her best interests.

 

But the financial industry didn't back down, and instead doubled down with an even larger lobbying effort. They brought in the big guns like Jackson National life Insurance's CEO James Sofa, who predicted catastrophic results. "It will be very difficult, if not impossible, for financial professionals and firms to comply with the requirements”. (Awkwardly, the CEO of Jackson's parent company quietly told investors in an earnings call, "We are better situated than any of our competitors to address [the rule] quickly and effectively.” ) 

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And again, the industry lobbying was successful and they were able to successfully push a repeal of the rule through the Senate. But thankfully, the president stood firm on a veto threat, and the DOL was able to prevail. So in April 2017, the fiduciary rule will go into effect.

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So what does this mean?

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On April 2017, your financial advisor will have a fiduciary responsibility to you. This means that he/she must act in your best interests when advising you on your retirement funds. So if your advisor suddenly stops taking retirement money, that will be a huge red flag. In my opinion you should strongly consider choosing a different advisor and giving any investments they have put you in reevaluated by a fiduciary.

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If they do continue to take your money, it might be a fantastic time to ask him/her if they recommend doing anything differently going forward. You should strongly consider the advice that you hear since they now have a fiduciary duty. 

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What Won't Change?

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Of course, most financial advisors still won't have a fiduciary responsibility to you for your non-retirement savings. So most investors will still have to keep their guard up.

 

But the new fiduciary rule will hopefully force the industry to start promoting more and more products that are good for investors, rather than good for the advisors.

 

And hopefully it's a step on the path to the day when all advisors have a fiduciary responsibility to act in the best interests of all their clients' investments.

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