You might be surprised to know that, until now, your broker has not been required to put your needs above his own! The U.S. Labor Department announced new rules in April of 2016 which are designed to fix this problem. Although the new "customer first" fiduciary rules will not actually go into effect until the spring of 2017 and there will probably be court challenges, most of the larger brokerage firms have already begun to change their practices.
What are the New Rules Affecting Retirement Accounts?
The "bottom line" is that brokers and financial advisors now have to recommend suitable investments which are moderate or low in risk and have reasonable fees and commissions. They have to offer their clients investment products with lower commissions and fees, when two products are otherwise similar.
In addition, brokerage and investment advisory firms are required to direct clients to websites which explain exactly how they will be paid ... and those fees and commissions must be "reasonable." The brokers can still engage in revenue sharing with mutual fund companies, but that fact must be spelled out in detail on the website.
Brokers will also be required to act in the best interest of the clients when they roll over retirement funds from a 401(k) into an IRA.
Brokers will be discouraged from putting retirement savings accounts into investment products which are generally considered unsuitable, such as non-traded REITs or variable annuities. Brokers will also be discouraged from "churning" or actively trading stocks and options in their clients' retirement accounts.
There Are Exceptions to the New Fiduciary Rules
Although the new rules only apply to tax advantaged retirement savings accounts, such as a 401(k) or IRA, it is expected that the rules will also affect the way brokers deal with clients, in general. However, there are times when a broker or financial adviser may recommend an investment product to someone that will not necessarily follow the "lowest commission" philosophy.
For example, in some situations a variable annuity might be the right product for a person, even though the commissions tend to be higher than other products.
In addition, brokers and financial advisers who assist companies with a small 401(k) plan or assets that are less than $50 million, are exempt from some of the strictest rules. However, they still need to be careful to put the needs of the clients above their own!
Why Will There Be Court Challenges to the New "Customer First" Rules?
The Labor Department expects some firms to challenge the new rules. Some of those who object fear that these new rules will make it harder for people to build their savings, because they will be steered towards low-risk, slow-growth, low-commission "standard" investment products, with little creativity.
Other firms are worried that the new rules will result in constant lawsuits, whenever any retirement savings account loses money. They feel that compliance with the rules will become burdensome.
What Should Consumers Do?
If you have any questions about whether or not you are being offered the best low-risk investments for your retirement accounts, with the most reasonable commissions or fee-sharing arrangements, you should interview more than one investment adviser.
If you have any questions, make sure you read anything you sign thoroughly, and check the disclosures on the company website. While most firms will comply with the new rules, there will always be some unscrupulous advisors who will still try to take advantage of consumers. Ultimately, it is up to you to shop around, compare products and investigate every investment thoroughly.
The Bottom Line on the "Customer First" Labor Department Rules
In general, large investment firms seem to support the new rules; smaller firms are more nervous about them. The following statement was released by Merrill Lynch:
"We support a consistent, higher standard for all professionals who advise American people on their investments." -John Thiel, Merrill Lynch
The goal of the new rule changes is to protect the "little guy" from having their retirement assets eaten up by large commissions or losses caused by inappropriately risky investments. Because of this, many consumer advocates applaud the decision of the U.S. government to establish these regulations for brokers and investment advisers.
Suze Orman said the following about the new regulations on her Twitter account: "Congrats to the Labor Department for its regulations requiring financial advisers to act in the best interests of their clients retirement $"
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