In early April, the Ministry of Labor published the final version of its new fiduciary rules. These rules will redefine how financial advisors who work with their clients’ retirement accounts do business.
Here’s an overview of the rules and how they can affect financial advisers and their clients.
Read: What To Do With Your 401k If You Quit A Job
The new fiduciary rules: an overview
The new rules mean that financial advisors advising on retirement accounts must put their clients’ interests above their own when recommending financial products and investment strategies.
The current standard in the brokerage industry is suitability, which is vague at best. Suitability means that the recommended products must generally meet the needs of the customer. High expenses and conflicts of interest do not play a role here.
Implementation of the new fiduciary rules will begin in April 2017, and full implementation will take place on January 1, 2018.
How the escrow rules affect the interactions between financial advisor and client
Financial advisors dealing with retirement accounts must act in the best interests of their clients and disclose conflicts of interest. The instrument for this is called Best Interest Contract Exemption (BICE).
The BICE is a disclosure agreement that customers must sign in a variety of situations including proprietary mutual fund use, annuities, and situations where transferring a customer’s money from their 401k to an IRA can result in increased costs.
The final terms and requirements of the BICE disclosure have been watered down from previous releases, but they will open customers’ eyes. The disclosures are likely to have a greater impact on brokers and those who derive all or part of their income from the sale of financial products. Paid financial planners will also be affected, especially in the area of 401,000 rollovers.
It is likely the trend towards fee-based accounts in the brokerage industry will continue to accelerate as commissions on IRA accounts are harder to justify.
Why the escrow rules are a win-win for customers
The new rules are generally beneficial to customers, but some observers would have liked the final rules to have more teeth. The DOL appears to have given in to the financial services lobby by toning down some of the disclosures. For example, there is no need to disclose the estimated cost over time of financial products that require BICE disclosure.
Overall, the rules seem to be of benefit to customers. But, with a year to gradually roll out the rules, brokers have a fair amount of time to decide how best to use them.
Some, including House spokesman and finance guru Dave Ramsey, have warned that these rules will make financial advice less accessible to the middle class. The reality, however, is that there are many consultants who only work with medium-sized clients on a fee basis. Many are members of NAPFA and The Garrett Planning Network. Robo-advisors also remain a good alternative for some.
How Escrow Rules Can Increase Financial Advisor Costs
Anecdotally, I’ve seen cases where brokerage firms have increased their costs for clients, especially on smaller accounts. In one case, a large brokerage firm told a client that these new rules would increase the fees on their asset-based account by 65 percent.
Meanwhile, a friend attended a client meeting at his brokerage firm and said the rules then pending would likely result in increased fees for all accounts, not just IRAs and other retirement accounts.
On the flip side, the publicity about these new rules could make investors more aware of how much they are paying for financial advice, encouraging them to compare comparisons and asking financial planners more fee-related questions.