How New Rules for Financial Advisors Will Affect Your Retirement
“Are things absolutely crazy for you guys like they are for us??“
That’s how my friend Matt greeted me when we met for lunch last week.
I wasn’t sure what he was talking about. We both have teenage kids, so I thought maybe he was talking about family life.
Matt saw the questioning look on my face and said, “You know… All the April first stuff!”
It still didn’t register.
“What’s happening April first?” I asked.
And then it hit me. Of course! April 1, 2017 is the day on which financial advisors are required to start acting as a fiduciary for their customers.
It’s all part of the new rules handed down by the Labor Department which require brokers and financial advisors to act in the best interest of their clients.
Over the next hour, Matt explained what a headache these new rules were becoming. Like many other financial advisors, Matt’s firm is making some major adjustment to comply with the new rules.
Not all of these adjustments will work to our favor as investors…
Why Fiduciary Rules Are Necessary
According to the Department of Labor, investors are wasting as much as $17 billion each year in fees paid to brokers and investment advisors. Often, these fees are a result of advisors steering their clients toward funds and services which may not be great for you as an investor, but help the firm make plenty of money.
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In the past, many brokers were required to offer investment opportunities that were “suitable” for their clients.
That word “suitable” has a fairly loose legal definition which gave brokers license to offer a wide variety of investment opportunities to their customers. These investments could charge expensive fees which might be difficult to justify. but if the investment was “suitable” for customers it didn’t matter.
With the new rules, brokers and investment advisors will be held to a higher “fiduciary” standard.
Under this standard, financial advisors will be required to act in the best interest of their customers.
While you might expect advisors to already be acting in the best interest of their customers, that hasn’t always been the case. Starting April 1 (when the new rules start to implemented), investment advisors will need to be able to prove that they are acting in the best interest of their customers.
Honestly, I think the new rules are an important step in the right direction. Financial advisors should be held to a higher standard. With or without the new rules, when you walk into a professionals office, you expect that professional (be it a doctor, lawyer or financial advisor) to act in your best interest.
The implementation of these rules, however, may be very challenging.
How New Rules for Financial Advisors Will Affect Your Investments
As an investor, you need to be aware of how these rules could affect you. Here are the three biggest changes I expect to see:
1) You’ll be steered toward low-cost index funds.
In the future, you can expect your broker or advisor to advocate buying low-cost index funds. This way, your advisor can claim that they are not charging you wasteful management fees for actively managed mutual funds.
Of course you’ll still pay your advisor a fee for giving you this “advice.” But you may not have to tack on another fee for the expensive mutual fund he may have recommended in the past.
The question you should be asking yourself is whether you really need to pay a broker or investment advisor to help you buy these funds. After all, you could easily do this on your own with a cheap discount brokerage account.
2) Less comprehensive financial advice.
My friend Matt mentioned that he was very hesitant to bring up any extra topics with clients. For instance, if he was being paid to give investment advice, he wouldn’t want to ask questions about life insurance.
By discussing non investment-related financial topics, Matt could accidentally put himself and his firm under MORE regulation for offering financial planning services (versus just retirement advice).
While Matt wants to be generous with his time and his clients, he can’t justify the additional regulation without also charging for financial planning. So in the future he just won’t bring up other topics to discuss.
3) Smaller accounts to be dropped
Thanks to the new rules, it’s becoming more and more costly for investment advisors to offer services. If your account size is small, you may no longer be a profitable customer.
Over the next six months, I expect to see a lot of advisors “fire” small customers. It is simply too expensive for them to keep these customers. The amount of documentation needed to prove that advisors are fulfilling their fiduciary duty doesn’t justify the amount of revenue they get from clients with small accounts.
Here’s What to Do…
If you’re worried about how the new rules will affect your retirement, you should be! Unfortunately, the new rules are going to make it harder (not easier) for investors to find good advice.
The good news is that you can manage your own retirement account. (And you can do a damn good job of it too.) You may just need some help in figuring out what to invest in.
That’s basically why I created this website, and why I write investment newsletters for Agora Financial.
I know you don’t want to spend your day analyzing individual stocks and bonds. But you also don’t want to pay a large portion of your hard earned retirement funds to an advisor (who may not have your best interest in mind).
Fortunately, I don’t have to deal with the same regulatory handcuffs. As long as I’m not giving individual investment advice, I can give you my honest opinion about different investment opportunities.
And since I don’t collect commissions on the opportunities that I write about, you don’t have to worry about whether I have a hidden agenda or not.
Instead of counting on traditional Wall Street advisors, you owe it to yourself to be educated about your investments. By following a few trustworthy retirement experts, you can manage your own account using their guidance.
I think this will leave you in a much better financial position. This way, you can keep more of your investment income (without paying advisor fees), allowing you to focus on the things that really matter.
As always, I’d love to hear what you think! Shoot me an email any time at Zach@ZachScheidt.com
Here’s to growing your income!