WASHINGTON, April 17, 2016 — The Department of Labor (DOL) has finally issued a new rule that all owners of retirement accounts will applaud. After years of debate, posturing and compromises, consumers now have a real financial and legal victory in hand.
On April 6, 2016 the new Conflicts of Interest Rule was promulgated requiring a higher standard for the management of your retirement account. Financial advisors must act toward your retirement account as a fiduciary, beginning after April, 2017, and enforcement begins in 2018.
Until now, financial advisors were allowed to manage your retirement account money based on a standard of “suitability.”
Tony Robbins, in his best-selling book “Money, Master the Game,” says “by legal definition, all they have to do is provide you with a product that is suitable.” He asks “what kind of standard is ‘suitable?’ Do you want a suitable partner for life? Are you going to be promoted for doing suitable work? Let’s go to lunch here, I hear it’s suitable.”
Now, financial advisors must adhere to a higher legal standard: they must deal with your money as a fiduciary, meaning they must put your interests first, above their own and above the interests of the brokerage firms where they work.
Robbins: “A fiduciary is a legal standard (the gold standard) adopted by a relatively small but growing number of independent professionals who have abandoned their big-box firms, relinquished their broker status, and made the decision to become a registered investment advisor. These professionals get paid for financial advice, and, by law, must remove any potential conflicts of interest (or, at a minimum, disclose them) and put the client’s needs above their own.”
The new DOL rule has a few key provisions. First, advisors can no longer earn commissions when selling you a financial product without potentially facing legal liability. What is currently happening for most individuals is that every buy and sell transaction carried out by your advisor is rife with a conflict of interest. This is because the advisors who are paid on a commission are paid for each transaction.
Jason Howell, a local wealth advisor and President of Jason Howell Company, is quick to point out that the conflicted status of financial advisors is a result of the system in which they work. For example, conflicted advisors receive commissions from mutual funds via an employer that serves as the broker. This is the way the broker-dealer system is set up.
Whew. Got all of that? It gets to be more fun.
Financial advisors dealing with any new retirement accounts opened after April, 2017 must become a fiduciary for that account, or they will risk facing legal liability. This means that those handling your newly opened retirement accounts must free themselves of conflicts of interest or disclose those conflicts to you when such accounts are opened.
It is important to understand that your now existing retirement accounts will be “grandfathered,” meaning your advisor does not have abide by the new rule. The new rule mandates a change in the way your advisor will handle new accounts opened after April, 2017. A key to the rule requires disclosure of conflicts of interest for new accounts.
But hooray! Disclosing conflicts is only step one. You must agree to allow such conflicts to continue if you want your broker to continue managing your funds without shredding the conflict.
Enter Best Interests Contracts that now must be signed by you and the advisor. The contract commits the advisor to a fiduciary standard when giving you advice, advice that must be in your “best interests.” The contract also limits the advisor to earning “reasonable” compensation, and requires both disclosure and transparency about the products and compensation involved.
Translation: for new accounts, your advisor, beginning next year, must:
- Act as fiduciary for you by giving you advice in your best interest;
- Can only earn “reasonable” compensation; and
- Must disclose all conflicts and be transparent about the investments he or she is suggesting to you and the compensation he or she will earn if you agree to take those suggestions.
Next, the DOL fiduciary rule has some real teeth. Up until now, if you did not like what your financial advisor was doing, you could not file a lawsuit. You were not allowed to sue because you waived that right in the new account application that you signed. Likely you did not even know that the application you were requred to sign indicated that disputes would be handled in an arbitration forum. Guess which side arbitration favors? Right – the brokerage house.
Now, the new rule prohibits lawsuit waivers. You can sue. Well, almost. You can sue in the form of a class action lawsuit. The new DOL rule does not make clear if you can file suit by yourself. Nonetheless, it is relatively easy for your attorney to form a class of aggrieved individuals and sue the brokerage firm as a class action.
The class action lawsuit provision in the new rule is truly monumental. Now, that the legal standard by which all Wall Street’s retirement account actions will be judged has been upped. The lawsuit provision of the new rule goes further and ensures that a court will have the final say-so as to whether the brokerage firm did what it was supposed to do. Litigation is the enforcement provision. The DOL is not there to monitor or enforce their new rule.
Note clearly: the new fiduciary rule applies only to Retirement Accounts – 401(k) plans, 403(b) plans, IRAs and TSPs (Thrift Savings Plans).
Jason Howell is a fiduciary wealth advisor. His company is a Registered Investment Advisory (RIA) company in Virginia. This means they have to act as a fiduciary. Robbins recommends only dealing with RIA firms and fiduciary advisors. Howell says that fiduciary advisors must have a Series 65 (Uniform Investment Advisor Law) license.
Advisors in brokerage houses can also qualify, if they have both Series 7 and Series 66 licenses, which go together. In the confines of the brokerage house, however, these advisors have to toggle between being a fiduciary sometimes, and sometimes not. With commissions, otherwise honest financial advisors cannot really be a fiduciary 100% of the time.
Howell shares the opinion with most others in the know in the financial world that eventually all investment accounts will be required to be managed by the fiduciary standard. The Securities and Exchange Commission (SEC) will be involved in that process. That will be good for all of us.
What should you do now? Howell says to contact your financial advisor and ask him or her:
- Are you a fiduciary, or are you going to wait until 2018?
- What fees – all fees – am I paying now?
- Who am I paying fees to? (advisor, advisor’s firm, mutual fund company)
- Will you put the answers to all of these questions in writing?
Howell advises that if the answer to #4 is “no,” you should switch brokers.
This columnist highly recommends asking questions.
Paul A. Samakow is an attorney licensed in Maryland and Virginia, and has been practicing since 1980. He represents injury victims and routinely battles insurance companies and big businesses that will not accept full responsibility for the harms and losses they cause. He can be reached at any time by calling 1-866-SAMAKOW (1-866-726-2569), via email, or through his website.
His book “The 8 Critical Things Your Auto Accident Attorney Won’t Tell You” can be instantly downloaded, for free, on his website: http://www.samakowlaw.com/book.Click here for reuse options!
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