On Feb. 23, 2015, President Obama declared, "Today, I'm calling on the Department of Labor (DOL) to update the rules and requirements that retirement advisors put the best interest of their clients above their own financial interests. It's a very simple principle: You want to give financial advice, you've got to put your client's interest first."
This change surprised retirees who didn't realize their advisors were not already following such a principle.
You see, biased advice from brokers drains $17 billion a year from retirement accounts, according to a 2015 report by the White House Council of Economic Advisers.
According to Money Morning Capital Wave Strategist Shah Gilani on Feb. 8, the fiduciary rule "is a great idea designed to protect consumers from slippery brokers selling them complex financial products they don't understand just to line their pockets with commission."
But the fiduciary rule won't go into effect anytime soon; in fact, it may not go into effect at all...
At the earliest, the former president's executive action is scheduled to go into effect on April 10. However, on Feb. 3, the Trump administration requested that the DOL review the rule further, with an eye to cost-benefit. Days later on Feb. 9, the DOL responded by submitting a request to the Office of Management and Budget (OMB) for 180 days to review the rule. That pushes implementation to at least July 2017. And after all the delays, there's still a chance the fiduciary rule could be completely nixed should the DOL determine the rule will cost Americans more than it benefits them. The agency can publish a proposed rule that rescinds the executive action altogether.
That's why it's important to closely examine your relationship with your retirement advisor right now, while the fiduciary rule remains in limbo.
By asking these three questions up front, retirees can avoid financial advisors who don't put their best interest first...
Question 1 for Your Retirement Advisor: Are You a Fiduciary?
By asking this, you ensure your retirement advisor is required by law to act in your best interest. If he or she is, you'll have a legal remedy in the unfortunate circumstance that one would be needed (i.e., you'd be able to sue your advisor).
Additionally, to make sure the advisor is truly acting as your fiduciary, you can ask:
- Are you willing to perform as a fiduciary with a duty to act in my best interest?
- Are you willing to divulge any conflicts of interest that may interfere with your ability to act in my best interest?
And if they answer these questions with a yes, make sure they are willing to put this commitment in writing.
Question 2 for Your Retirement Advisor: How Are You Being Paid?
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All of a retirement advisor's compensation should come directly from their clients. Any other source of income should be fully disclosed. If advisors earn commissions on trades, trailer fees for mutual funds and annuities, and bonuses tied to their firm's proprietary investment products or trading, you will want that information.
For example, brokers may recommend clients "ETF A" over "ETF B" because the company that manages ETF A pays a higher commission to brokers than that of ETF B. However, ETF B yields higher return -- meaning you as the investor walk away making less money than you should have.
You can find out how your retirement advisor is being compensated by asking:
- Do you earn fees or commission based on the number of products that I buy or the size of my investment?
- If I invest in a certain product you recommend, will you earn a higher fee or other type of commission?
- Will you receive fees for services related to specific investment products?
And just as earlier, make sure your advisor is willing to provide you a list of the fees and commissions they receive either directly from you or from other sources in writing.
Question 3 for Your Retirement Advisor: What Are My Fees?
"Think of fees like termites, their tiny, their barely noticeable, and they can eat away your future." - Comedian John Oliver of HBO's "Last Week Tonight," June 12, 2016
Fees are a "silent" enemy of investors. Keep a close eye on how much you are paying to maintain an active account with a retirement advisor and understand that a fee of 1% to 2% can have a surprisingly large cumulative impact on your account.
For example, in 2013, PBS' "Frontline" aired a documentary called "The Retirement Gamble." Therein, Vanguard Investments founder John Bogle talked about the costly effect fees can have on your money. He noted that a "little" 2% annual fee will erode a staggering 63% of what investors could earn in their retirement accounts that booked a 7% annual average return (pre-fees). In other words, what he called "the tyranny of compounding costs" whittled the $100,000 an investor should have down to measly $37,000 over 50 years thanks to fees.
More on Retirement
401(k)s will be driving the markets in the near term, but there's another retirement investment Keith Fitz-Gerald wants our Members to know about. It's one of his favorites, a kind of "desert island fund" he'd buy if he had to park his money in one place, "retire" from civilization for 20 years, and come back to a pile of money. Click here to learn more...
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