How do you know if your financial adviser has your best interests at heart? They all say they do. Then some of them turn around and sell you products with high (often hidden) costs that line their pockets at your expense. The government estimates that individual retirement accounts alone lose $17 billion a year to "me-first" investment advice from salespeople who wring large commissions and fees from their trusting clients. That's money that could have been used to brighten your life.
Last year, the U.S. Department of Labor issued a new investor protection rule covering advisers who handle IRAs and 401(k)s. It would require them to act as fiduciaries—meaning that, when giving advice, they would have to put your financial interests ahead of theirs. If they sell you a mutual fund with a high commission when low-commission versions are available, their actions would be not only dishonorable, they would be against the law.
Not surprisingly, the brokerage and insurance industries hope to kill the rule. But because it was supposed to be implemented this month, financial firms necessarily prepared to comply. Fees dropped at some firms, and new, low-commission products were introduced. Then the Trump administration proposed putting off the start date until June, pending further review of the rule. What happens now?
Most likely, some of the reforms will last because the industry knows you want them. Others might be lost. Either way, here's your path to getting trustworthy advice.
Ask the person managing, or offering to manage, your investments to state in writing that he or she will act as a fiduciary at all times, for retirement and nonretirement accounts. That's especially important for less sophisticated investors who depend heavily on professional advice. Knowledgeable clients already demand fiduciaries for all their money.
Ask the adviser to compare the costs and benefits of leaving your retirement money in your 401(k) versus investing it through the firm's IRA. You want a good-faith estimate, in writing, of what you'll pay in direct fees or sales commissions, plus any payments the adviser's firm quietly receives for selling particular mutual funds or annuities, says Ron Rhoades, director of Western Kentucky University's financial planning program. Don't settle for generalities; get specifics. True fiduciaries will give them to you.
Consider choosing an adviser who charges flat fees — such as a percentage of managed assets or a fixed amount per year — rather than those who also take commissions. Fee-based advisers can be expensive, too, so you still have to check. But commissioned advisers are those most likely to push complex products, such as annuities whose sky-high costs dwarf any benefits.
Don't be blinded by titles like "financial adviser" or "wealth manager." If they're not fiduciaries, the advisers can earn commissions on sales, and they're legally entitled to put your interests last. Even if they are fiduciaries, they still might persuade you (wrongly) that costly investments are in your best interest. The industry isn't fighting the fiduciary rule for nothing. Remain on guard.
Jane Bryant Quinn is a personal finance expert and the author of How to Make Your Money Last. She writes regularly for the AARP Bulletin.
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