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8 Things You Need to Know About the New Investor Advice Rule

But keep in mind it’s still under review by the Labor Department and SEC

Investor Advice Feduciary Rule

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A new federal rule aimed at ensuring that investors are receiving retirement advice in their best interests kicks in June 9.

Years in the works by the Department of Labor, this so-called fiduciary rule sets a higher standard for brokers and other financial professionals than what’s been required of them for decades under federal pension law.

“We think this is the most significant positive impact for retail investors in the last 40 years. It’s a big change,” says Jon Stein, CEO of Betterment, a New York-based portfolio management firm. “It protects people who are getting retirement advice.”

The rule took effect last year, although advisers originally had until April to comply. But President Donald Trump this year asked the Labor Department to review the rule, which pushed the compliance deadline to June 9. Meanwhile, the Securities and Exchange Commission announced it was seeking public comment on whether it should introduce a fiduciary standard to a broader group of advisers.

It’s possible the Trump administration will modify the rule later on. In any event, here’s what you need to know about the fiduciary rule:

1. What is a “fiduciary”?

Simply put, a fiduciary is someone who must act in the best interests of his or her client.

Under the rule, professionals who proffer investment advice on retirement accounts must put the interests of their clients first. They can’t charge more than “reasonable” fees and can’t make “misleading statements about investment transactions, compensation, and conflicts of interest,” according to the rule.

2. Don’t all advisers put their clients first?

No. When the regulations to oversee financial professionals were created in 1940, a distinction was made between registered investment advisers who give advice and salespeople who make transactions on behalf of customers.

Registered advisers are held to a fiduciary standard. But the rules for salespeople, including brokers and insurance agents, are less strict. They must only make sure the investment they recommend is “suitable.” So they can steer clients into investments that may pay them and their firms the highest fees and commissions, as long as the product is appropriate to the client’s age, goals, tolerance for risk and other factors.

Over the years, these salespeople have rebranded themselves as advisers, says Barbara Roper, director of investor protection with the Consumer Federation of America. “Everything about the way they market themselves to customers is designed to send the message that they are objective advisers acting in their customers’ best interests. But that’s not what they are legally required to do,” she says.

3. Does this new rule apply to advice on all investment accounts?

No. The rule applies to financial professionals who are being paid to give investment advice on retirement accounts, such as 401(k)s and IRAs.

It does not cover advice on college savings plans or regular brokerage accounts. It also doesn’t apply to government-sponsored retirement plans, such as the federal Thrift Savings Plans, state 457 plans and most 403(b)s, which are typically offered by schools.

And advisers won’t be held to a fiduciary standard if they are providing general educational information.

4. Why is the Labor Department doing this now?

The Labor Department is playing catch-up, says Michael Kitces, director of wealth management at Pinnacle Advisory Group in Columbia, Md. When the federal pension law was established, it set a standard for traditional pensions. At the time, IRAs were brand new and 401(k)s didn’t exist.

But as pensions disappeared and were replaced by 401(k)s and similar plans, the investment decisions fell on workers. There were no protections under the old law to make sure these employees received appropriate advice, Kitces says. The new rule is meant to correct that.

5. Will workers in 401(k)s notice a difference?

Not so much. But where the rule should have the biggest impact is on workers on the cusp of retirement who seek advice about rolling over their 401(k)s into an IRA.

“Often they are most vulnerable at that point,” says Betterment’s Stein. “That’s when they are being sold some kind of product from someone holding themselves out as an adviser.”

Another group likely to see a significant change are small employers  and their workers, Roper says. “The costs in small plans are appalling. They can be so high they eat up all of the tax benefits,” she says.

Going forward, the advice these employers receive from brokerages and insurance companies on investment options in plans will have to meet the fiduciary standard, she says. This ultimately will drive investment costs down, Roper says.

6. Does the rule mean the adviser must always recommend the investment with the lowest fee?

No. An adviser could suggest, say, a mutual fund with a slightly higher fee because it boasts a strong money manager.

“You don’t have to recommend the cheapest, but you do have to defend why you recommend something else and why it was in the client’s best interest,” says Sheryl Garrett, founder of the Garrett Planning Network in Eureka Springs, Ark.

However, if the investment choice is between two nearly identical funds, the broker will have to recommend the less expensive one, Kitces says.

7. Does the rule eliminate commissions that advisers earn selling particular investment products?

No, but it will require that these payments be clearly disclosed, Stein says.

8. What other changes can consumers expect?

Early next year, retirement advisers will have to provide updated contracts to clients stating they are a fiduciary, as well as disclosing compensation and any conflicts of interest.

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