An Obama-era financial regulation was set to go into effect April 10th of this year. The regulation requires brokers and retirement advisors to have your best interests at heart when giving advice — and not just their own. (If you thought that was a given, you’re unfortunately mistaken.)
But two weeks ago, Trump ordered his Labor Department to put the regulation under review — and it could fall onto the chopping block.
So what does that mean to you and your investments? Is it a good thing or a bad thing? And what can you do to ensure you’re always getting the best financial advice?
Let’s take a look…
The Story
The regulation in question is the “fiduciary rule.”
The fiduciary rule says that advisors must act in the best interests of their clients, rather than pushing them towards financial products just so they can get a commission.
They must also disclose all conflicts of interest, as well as clearly disclosing all fees and commissions the client will pay up front.
The Obama administration, citing the White House Council of Economic Advisors, claimed that without this rule in place Americans are losing $17 billion per year.
But Anthony Scaramucci, a former managing partner of Skybridge Capital and an advisor to Donald Trump, says the rule will cause the market to be over-invested in index funds, put financial advisors out of work, and leave many investors — who don’t want to pay upfront for financial advice — without options.
Why Should I Care?
The fiduciary rule has applied to Registered Investment Advisors (RIAs) since 1940. Consequently, RIAs usually charge an upfront fee to manage your money.
But brokers and retirement planners who manage IRAs and 401(k)s have been exempt. And as a result, they are far more likely to steer you towards mutual funds with high fees.
So if you currently have money invested in mutual funds via an IRA or 401(k), you may want to find out if your financial advisor is a fiduciary or not — more on this later — and if you’re paying higher fees than necessary.
Also, small businesses are usually the hardest hit. Because small business owners are famously short on time and may not know any better, they often start an employee 401(k) plan and hand over the reigns to a retirement planner without any oversight.
And that can end up being a bad deal for the employees.
A study by BrightScope research firm found that many small business 401(k) plans have fees as high as 3% to 4% per year, while others are at just 0.5%. And a business owner who is not paying attention may not spot the difference.
What Can I Do?
Many times you can completely bypass the issue by investing in your business first.
A retirement planner — even if they’re a fiduciary — will often tell you to pull money out of your business and invest elsewhere.
But that doesn’t make any sense if you haven’t fully funded your business. Investing in new equipment, or software, or training is likely to generate a higher return than investing in a market you don’t understand or control.
At some point, however, when your business is fully funded, it may make sense to work with an investment advisor. (Which is why we have a Registered Investment Advisor in our Accredited Network of financial experts.)
So what can you do to make sure your investment advisor has your best interests at heart?
First, ask them if they’re a fiduciary.
If they give a vague answer, ask who they are regulated by.
State securities regulators and the Securities and Exchange Commission regulate RIAs with the fiduciary standard. And the Financial Industry Regulatory Authority regulates those without the fiduciary standard.
(If they’re not legally a fiduciary, you can still ask them to sign a fiduciary agreement.)
Next, ask if they will act as a fiduciary for you at all times.
It’s possible for advisors to serve as both an RIA (fiduciary) and a broker (non-fiduciary) for the same client at different times. This is done by acting as a fiduciary when creating your financial plan, and as a broker when recommending investments.
And whether they’re a fiduciary or not, ask how your advisor gets paid and what fees you’ll be subject to.
Sometimes when your investment advisor is held to the fiduciary standard, it’s easy to stop asking questions.
But a fiduciary advisor is human. And sometimes they’re going to give financial advice that’s better for them than for you.
For example, many Registered Investment Advisors charge around 1% per year of your assets under management. Well that payment structure gives them an incentive not to tell you to pay your mortgage down — or to invest in your business — even if that’s the best thing to do.
So you always need to do your due diligence.
Finally, instead of setting up a 401(k) plan for your employees, consider creating an incentive compensation plan. Give your employees bonuses when they reach a milestone or achieve a goal.
This way they can use the money the way they choose — which may be in an IRA. But at least it will be up to them whether or not to subject their money to the dictate of the government.
What To Do Next
At Wealth Factory, we’ve always taught to avoid hidden fees and commissions by paying upfront for financial advice.
Because there’s plenty of sound financial advice that doesn’t come with a commission.
Liquidity, 6 months of savings, wealth accounts, paying down loans (which is a guaranteed return) are all important pieces of your wealth architecture, yet there’s no commission involved.
If you follow that advice, the lack of a fiduciary rule shouldn’t have you worried.
With that in mind, here are 3 action steps to consider:
- Bypass the fiduciary rule by investing in your business first. Few financial advisors outside of Wealth Factory will suggest investing in your business, but as your best wealth-creator, it’s a no-brainer.
- If you’re invested in the markets, find out if you’re working with a fiduciary. Find out what hidden fees and commissions you’re paying. And regardless of fiduciary status, ask questions.
- Discover your Investor DNA. Another way to make the fiduciary rule a moot point is to invest in your strengths. You can do that by discovering your investor DNA with our free guide.
Build the life you love,
The Builders at Wealth Factory
What is Living Wealthy Weekly?
Each week we share timely trends, news stories, and current events that affect your life. We help you see the impact, personally and socially, and give you possible solutions to avoid any negative effects. We also give you additional links and resources if you want to investigate further. The purpose is not to be the last word on any topic. Rather it’s to help us all stay informed of what’s going on in the world without letting those events negatively impact your lifestyle. Our goal is to help us all live richer, fuller lives from a position of financial strength. This allows you to weather economic hard times, and seize whatever new opportunities arise in our changing world.
