Who Are the Real Financial Fiduciaries?
The DOL just published a new regulation that turns stockbrokers into financial fiduciaries when they provide financial advice and services to qualified retirement plans (401k) and IRAs. In the past, these non-fiduciaries (stockbrokers, agents) were allowed to sell investment products to plans and IRAs and be paid with commissions.
There is a provision in the new regulation that allows advisors to be paid commissions when they invest IRA assets. There must be a written contract, signed by the investor that authorizes this method of compensation. The rep is still a fiduciary, but the method of compensation changes from fee to commission.
It is also important to note that this new DOL regulation does not apply to non-retirement assets. Investors are on their own when they invest their personal assets with advisors and stockbrokers.
Are investors really better off?
It depends on how you define better off. There is an extra layer of protection for retirement assets when all types of advisors have to adhere to a fiduciary standard of care. However, the regulation does not protect investors from incompetent advice and unethical advisors will continue to prey on unsuspecting investors.
As was pointed out by another writer, regulations do not make investors safe. For example, burglary is illegal, but there are thousands of burglaries everyday. People lock their doors when they leave home to protect their possessions. Investors are still responsible for vetting advisors before they select them and monitoring their advice, risk exposure, expenses, and results.
There is a strong possibility that investors will actually be more confused when they select financial advisors. In the past, there were clear distinctions between financial fiduciaries and non-fiduciaries. Fiduciaries were paid fees. Non-fiduciaries were paid commissions. Now it is all blurred, which could make the advisor selection process even more risky.
And, the Wall Street marketing machine will do everything it can to make any remaining distinctions even blurrier. It is just getting started creating the loopholes that will minimize its own risk.
How do you protect your financial interests?
Require a written statement from all advisors, regardless of the type of asset (retirement, personal), that documents they are financial fiduciaries and they are compensated with fees for their knowledge, advice, and services. This is your best protection in a very confusing world.
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