Prompted by concern that many financial advisers have a sales incentive to recommend to their clients bad retirement investments with high fees and low returns because they get higher commissions or other incentives, the Department of Labor drew up a rule in April 2016 that compels financial advisers to act like fiduciaries.
The rule requires all financial professionals who offer advice related to retirement savings to provide recommendations that are in a client’s best interest. Currently, financial advisers only have to recommend suitable investments, which means they can push products that may benefit them more than their clients. The rule will mean that advisers cannot accept compensation or payments that would create a conflict unless they have an enforceable contract agreeing to put the client’s interest first. Advisers also will have to disclose any conflicts and charge reasonable compensation.
The rule’s requirement that advisers work in their client’s best interest will begin on June 9. But the requirement that advisers who accept commissions need to include a provision in customer contracts agreeing to put the client’s interests first will not take effect until January 1, 2018. The rule is difficult to enforce without the contract requirement, but changes to that part of the rule are possible after the DOL’s review.
The new rule does not solve every problem. It applies only to tax-advantaged retirement accounts like IRAs and 401(k)s and not other investments. And even after the fiduciary rule goes into effect, consumers should use caution when selecting a financial adviser. Ask your financial adviser if he or she is serving as your fiduciary. If not, then be aware that the adviser is not required to act in your best interest. You should also check your financial adviser’s experience and credentials and beware of phony credentials.