The Department of Labor under President Obama wrote a regulation called “The Fiduciary Rule”. It goes into affect June 9th. How does it affect you?
A fiduciary is defined as a person or organization that puts your best interests ahead of their own. Specifically, a fiduciary owes you both an ethical and legal responsibility to do the right thing for you. You would think that financial advisors would be required to be your fiduciary, but that has not been the case. The Department of Labor’s new rule is government’s attempt to require the financial industry to put the client’s interests first, ahead of the company’s interests.
I should mention that as a Certified Financial Planner and Registered Investment Advisor, I have taken a fiduciary oath. The majority of financial advisors have not. Instead, other advisors have been following a “best fit” rule that requires them to make sure that the products that they sell to clients “fit” into their overall portfolio. The majority of these are commission-based products that generate income streams back to the salesman. The salesman is given wide latitude in picking his commission percentage (the highest that he thinks that he can sell to the client). This is the type of activity that the government is looking to reign in with the Fiduciary Rule.
The Fiduciary Rule will require all financial institutions and their advisors to adhere to a fiduciary best practice. In order to make this happen, the majority of commission-based products have been removed from the marketplace. Most investors are being pushed into fee-only mutual funds/accounts. These accounts charge the client a set percentage of the total assets under management. If your investments have recently been moved into new funds, the reason behind the change may be to make sure that the new funds meet the requirements of the new Fiduciary Rule.
The Fiduciary Rule should help the average investor since it pushes the financial industry to put the client’s interests ahead of their own. This should also allow investors to better understand the overall costs of their investments and give them the ability to make a better apples to apples comparison when weighing investment decisions.