Effective April 10, 2017, the new DOL Fiduciary Rule will be phased into effect. The expected date of full implementation will be January 1, 2018.
The new rule will change the landscape of the financial services industry, as well as how we interact with the financial services industry. However, there are a lot of questions surrounding the new rule. Who will be affected? How will this affect consumers?
In this post, I will explain how the new rule may affect you and your finances.
Your Financial Advisor
Financial professionals will be affected by the new rule BIG TIME! In fact, this is where you will see the biggest change. So do not be surprised if your financial advisor changes the way he or she does business.
Historically, financial advisors have been compensated in one of three ways…
- Commission: commission or “load” based on what financial products are sold
- Fee-Only: fee for service such as billable hour and/or retainer
- Fee-Based: a combination of commissions and fees for service
- Assets-Under-Management: a percentage of the dollar amount of investment assets they manage for clients
The new DOL Fiduciary Rule will change how financial advisors operate when making recommendations in connection to retirement accounts such as the 401k and IRA.
Traditionally, financial advisors were obligated to uphold a “suitability” standard, meaning that any investment recommendations that they made should “make sense” for their clients. The problem with the suitability standard is that it is highly subjective. After all, virtually any investment option could be “suitable” for any person.
The change to the “fiduciary” standard now means that financial advisors are required to make recommendation that are in the best interest of their client. For fee-only financial advisors, this is not a big deal. For commission-based financial advisors, this is a HUGE deal! There will be more paper-work, documentation, legal filing, red-tape, and head-aches for advisors who continue to receive commissions for sales of investment products.
Your finances may actually benefit from this new rule. The aim of the new rule is to allow more transparency in the financial services industry, and crack down on financial advisors who take advantage of larger-than-usual commissions, fees, and kick-backs. Transparency, integrity, and a financial advisor who must look out for your best interest (over their own) – talk about a benefit to consumers!
As a result of the new rule, many financial professionals are adapting by getting rid of their commission-based services and moving to fee-only models. Doing so will help financial professionals mitigate monotonous paper-work. This will benefit individuals by eliminating (or at least minimizing) conflicts of interest.
If I were a betting man, I would have to speculate that we will see the following shifts in the industry over the next few years…
- Commission-based services will phase out of the marketplace
- Loaded mutual funds will phase out of the marketplace
- Fee-only financial advisors will become the norm
As far as how this affects me and my business…
The new rule is very much in support of what I do. In fact, employers who offer retirement plans to their employees will be required to act as fiduciaries. This will increase the need for education solutions, as well as thorough instruction as to how the 401k plan works.
Furthermore, the new rule draws a clear line between “advice” and “education.” Before, it was such a subjective standard and it was very important for me not to step on the line that I could not necessarily see. Now, the line has been clearly identified and it is much easier for me to know what is within my purview as an educator, and what is not.
The more research that I do, the more I like this new rule. I am not necessarily big on new government regulation, but this is one I can definitely get behind.
You can expect to see some major changes in the financial services industry over the next few years. The unfortunate fact is that the new rule will add monotonous work to the already full slate for commission-based financial advisors. This may make it more costly to do business, which could effectively price smaller net-worth individuals out of the market. However, good financial advisors will find a way to succeed and adapt to the marketplace. I for one will be interested to see how things work out.