Whose interest does your financial advisor serve?
The U.S. Department of Labor recently proposed regulations that would require professionals who are paid to advise individuals on their retirement savings to act as "fiduciaries." That means advisors need to put their clients' financial interests above the advisor's own interests when making recommendations. The proposals would apply to those who offer advice regarding 401(k) plans and IRAs.
The goal is to increase protection for consumers and the various professionals who manage retirement savings, while decreasing excessive transaction and investment management fees that lead to underperformance. The Labor Dept. estimates the savings could range from $210 billion to $430 billion over the next 10 years, adding directly to individuals' retirement savings.
The new proposals, however, are getting a lot of pushback from the financial industry, including from the Financial Industry Regulatory Authority and the Securities Industry and Financial Markets Association. Some financial industry execs say the proposals' intent may be commendable, but the specific requirements are unworkable and will raise administrative and compliance costs that ultimately would be passed to investors. Access to investment products and services for middle-income investors may also be reduced, they say.
On the other hand, some consumer advocates and professional groups are supporting the proposals. In addition, the CEO of Merrill Lynch has publicly urged the financial industry to work with the Labor Dept. on the proposed rules. And the large advisory firm Financial Engines has publicly applauded the department's effort to promote nonconflicted investment advice.
There's also evidence that investors are confused about whether their financial advisor is a fiduciary. One study shows that four out of five investors believe their advisor is a fiduciary or acts in their best interests. Obviously, the Labor Dept. thinks otherwise.
So, what does this mean to individuals saving for retirement? The proposals are yet another strong message that it's critical to optimize your investment returns and minimize your investing costs. By doing so, you'll accumulate thousands of dollars more by the time you retire.
Some financial industry representatives say education and disclosure are all that's necessary to prevent some of the worst abuses. In that spirit, let's review some of the abuses the Labor Dept.'s proposals are targeting that you'll want to avoid:
- Some advisors may try to persuade you to roll your 401(k) over to their IRA, even if your 401(k) plan has better-performing funds with lower costs. When you terminate employment, you'll want to carefully compare the investment performance and costs of the funds in your 401(k) plan with potential IRA rollovers. Your 401(k) plan's performance and fee disclosure statement helps you make this comparison. Your former employer's 401(k) plan may be the best place to leave your savings.
- Some annuity products have high commissions and/or severe withdrawal restrictions. Make sure you understand when you can withdraw your money, any penalties that may apply and how much you're paying for the product. Ask how much of a commission might be paid from your investment and if lower-cost products are available.
- Some investing products have high front-end loads, 12B-1 fees or high ongoing investment management charges. Annual investment management fees well above 1 percent (100 basis points) should be a red flag. Ask about all the fees you might be paying.
Of course, many insurance and investing products are fairly priced, and many advisors do put their clients' interests first. Your job is to spend the time and effort to find them.
The bottom line: When it comes to your retirement security, it's buyer beware. While federal rules and regulations may eventually provide some protection, you're the best person to put your interests first.