The Department of Labor has issued new rules aimed at helping those saving for retirement. The rules are intended to prevent financial advisors from steering their clients to bad investments that offer higher payments to the advisor by requiring financial advisers to act in the best interests of their clients.
Prompted by concern that many financial advisors 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, in February 2015 President Obama directed the Department of Labor to draw up new rules that require financial advisors to act like fiduciaries. A fiduciary must provide the highest standard of care under the law. Americans may lose as much as $17 billion every year because of bad financial advice from advisors with conflicts of interest, according to a report by the President’s Council of Economic Advisors.
The new rules require all financial professionals who offer advice related to retirement savings to provide recommendations that are in a client’s best interest. Previously, financial advisors only had to recommend suitable investments, which meant they could push more expensive products. Now 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. Advisors must also disclose any conflicts they have and charge reasonable compensation.
The new rules do not solve every problem. They apply only to tax-advantaged retirement accounts like IRAs and 401(k)s and not other investments. In addition, with consent from the client, advisors can still charge a commission and engage in revenue sharing. Investors are still most likely to get the most straightforward advice from a financial advisor who receives a flat fee, rather than a commission.
The new rules go into effect in April 2017, but they won’t be fully adopted until January 2018.