After years of research, deliberation, commentary, and delay, the Department of Labor’s fiduciary rule raising the standards for retirement savings advice is finally starting to go into effect. Tomorrow, two key provisions of the rule finally become applicable: One governs who qualifies as a fiduciary for retirement accounts, and the other requires fiduciaries to adhere to what are called impartial conduct standards.
At Betterment, we were delighted by the news that implementation is starting. For more than a year, we’ve been pressing lawmakers to make good on the promise of the fiduciary rule. When it comes to advice on retirement saving, we think much of the financial industry is just plain backward. Too many financial companies today profit by putting their financial interests ahead of their customers, and that’s a problem not just for their customers’ accounts but for how we, as a nation, manage retirement.
The Financial Industry Faces a Pivotal Moment
If part of the American Dream is to be able to retire without worry, the United States needs the financial industry to look out for future retirees—not just for maximum profit. By implementing the fiduciary rule in full, the Department of Labor can help the industry reorient itself toward aligning with customers’ needs. Instead of profiting from commissions and kickbacks that have very little to do with customer needs, investment managers under the fiduciary rule will be paid more directly for their service to clients. In effect, the DOL has the opportunity to chart a new vision for how our nation manages retirement.
But in order for us to achieve a new era in the way retirement is managed in America, It’s going to take some muscle to bring the product-pushers of the industry into alignment. The DOL provisions going into effect this week don’t yet include the legal enforcement mechanisms designed to make sure companies who provide retirement advice comply with the law. And without that accountability, improved standards for fiduciary advice may not mean much for actual investors.
The Fiduciary Rule Needs Muscle
The primary enforcement mechanism in the fiduciary rule, as it was initially drafted, is termed the “best interest contract” (BIC). This contract, which is supposed to be a requirement for money managers that give conflicted advice, would allow IRA holders to sue providers that take advantage of them. Without the requirement for a BIC, the rule provisions going into effect this week may have limited effect on how many financial firms actually behave.
Just imagine hiring a broker (or money manager) who is effectively able to say that they’re acting in your best interest, but there is no actual threat of consequences if they don’t deliver. It would be akin to letting food brands advertise being “FDA approved” without actually being analyzed by the FDA. If—as an industry—brokers, fund companies, banks, and financial advisors are all going to be called retirement fiduciaries under the new rule, then we should have well-enforced provisions for making sure fiduciaries act as fiduciaries.
If the DOL chooses not to fully implement the rule, including the BIC requirement, come January 1, 2018, then there’s a chance that the already frequently confused distinction of being a fiduciary becomes even more misunderstood over time. Americans deserve a crystal clear distinction between advisors who actually follow a fiduciary standard and those who do not. A fiduciary rule without the BIC would result in an empty and unenforceable legal standard.
To make the gains of the day still more tenuous, it’s clear that even as financial incumbents fight against the fiduciary rule’s enforcement, they’re also trying to roll back the provisions going into effect tomorrow. Just this week, newly appointed Secretary of Labor Alexander Acosta said that the financial industry’s concerns were ignored when the rule was drafted and explained that the DOL is reviewing the rule in its entirety. If that process leads to a rollback of the provisions going into effect tomorrow, the positive progress represented by the fiduciary rule will be lost.
Fiduciary Rule Progress Is Good, But Americans Need to Be Diligent
With the fiduciary rule’s enforceability in question, Americans have to continue to be diligent about their relationship with financial advisors. It’s important to understand how your advisor is paid, what their underlying conflicts of interest might be, and why they advise you the way they do.
Think of your advisor like you might a doctor. When you see a physician, you trust them to be an expert in their field and to do what’s best for your well-being. Yet, that trust is also earned: It emerges from how they answer your questions, provide various treatments, and explain what outcomes you can expect next.
The same form of trust-building should happen with your financial advisor, regardless of how the fiduciary rule shakes out in the end. Whether you work with an online investment advisor, like Betterment, or an in-person advisor, focus on being diligent: learn to ask the right questions, don’t settle for surface-level answers, and stay active in your financial future. You don’t have to be a financial expert to be a good financial services customer.
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