On Wednesday April 6, the Department of Labor revealed their new fiduciary standard for retirement accounts. The basic gist of the new rule is an attempt to create a fiduciary standard of care (the highest level of care for an advisor/proxy/manager) for retirement accounts no matter who is providing the advice. Here’s the video:
Prior to this ruling, the standard of care that you received depended on the type of advisor you retained. If you retained a Registered Investment Advisor, or an RIA representative, you by law, received the fiduciary standard of care on your money. If you hired a broker or financial salesperson (an insurance agent), you did not get an advisor that had a required fiduciary standard. You got a much less stringent suitability standard.
Here is the new standard (from the DOL announcement Factsheet):
The types of relationships that must exist for such recommendations to give rise to fiduciary investment advice responsibilities include recommendations made either directly or indirectly (e.g. through or together with any affiliate) by a person who:
- Represents or acknowledges that they are acting as a fiduciary within the meaning of ERISA or the Internal Revenue Code (Code);
- Renders advice pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular investment needs of the advice recipient; or
- Directs the advice to a specific recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.
The recommendation must be provided in exchange for a “fee or other compensation.”
The New Fiduciary Standard
The DOL new fiduciary standard ruling comes on the heels of greater scrutiny on fees and expenses. And reacts to potentially inappropriate product recommendations on IRA rollovers from 401ks and 403bs. Specifically mentioned in the press conference (see video) is a story about a couple whose 401k was rolled into a variable annuity with a 4% annual fee.
[Here’s the DOL video above cut to start at the variable annuity story I just mentioned:
Anyone who reads my stuff knows I already blasted the high fee variable annuity problem in this article: Variable Annuity Fees Problem and the Unstoppable Move Toward Advisor Annuities. I also offer a free report to help people understand annuities (Click HERE). So I’m out there trying to educate. And of course I feel education is in my best interest too as a primarily flat fee based advisor.
And as an RIA I already follow the fiduciary standard when it comes to my clients. So this doesn’t affect what I do.
Who Gets Hurt by the New Fiduciary Standard
Theoretically, the increased disclosures of fees could hurt those who earn high commissions from certain IRA rollover products and who didn’t previously disclose such costs. Imagine these 2 scenarios:
- “Hi Mrs Jones, I am recommending the XYZ variable annuity. It’s going to be invested but also has the protection of a guaranteed income benefit. Which means your benefit base in the account will grow 7% per year despite what the market does. Then when you decide to take the money, XYZ will pay you 6% per year on that balance that has grown 7%. or on the investment account if the market does better.”
- “Hi Mrs Jones, I am recommending the XYZ variable annuity. It’s going to be invested but also has the protection of a guaranteed income benefit. Which means your benefit base in the account will grow 7% per year despite what the market does. Then when you decide to take the money, XYZ will pay you 6% per year on that balance that has grown 7%. or on the investment account if the market does better. But also I must tell you that this account has mortality and expense charges of 1.25%, the fee for the guaranteed income benefit is 0.8%/year, for the death benefit another 0.35%, and for the managed fund it’s another 0.9%. Your total annual fees will equal 3.3%.”
If further explained in dollar terms, the second statement would sound even worse.
Bottom Line on the New Fiduciary Standard
The financial field is full of good people. But there are plenty of people who maximize gain first. I have been in this industry for 21 years and in the beginning, I certainly put a lot of thought into personal gain. It wouldn’t surprise me if there were now, many newer financial reps trying to do the same.
It says something for working with an independent, experienced advisor and not perhaps with the nephew who brings his “manager” along for training (hey that was me once!). the whole field is bit screwy in that unlike other professions, financial advisors often start with nothing. It doesn’t surprise me if they must juggle what’s right with paying the bills. In other fields, professionals are much more likely to earn some kind of salary before striking off on their own.
This is changing with the growth of Registered Investment Advisors. many new advisors entering the field are educated people who want to be in the field. And start by getting a job at an established advisory firm. Compare this to the historical candidate who was in financial services because he couldn’t get a job anywhere else. And his ability to sell was his primary determinant of success.
If you’re considering a financial advisor, consider working with Chris! Or check out this handy questionnaire guide I created to help people choose whether or not they should work with an advisor, what type of advisor they should choose and what type of relationship would work best. Download that by clicking the image:
Thanks for reading!
