The Department of Labor, which regulates tax-advantaged savings accounts, made the decision earlier this year to broaden the scope of an already-existing fiduciary standard concerning how investment advisers are compensated for their work. The decision was made to help prevent conflict of interest in the world of financial advising. Ultimately, its goal is to prevent advisers from putting their interest in earning high commissions before the client’s interest in obtaining the highest return on investment possible.
Currently, only financial professionals and firms registered as investment advisers with the Securities and Exchange Commission are subject to the fiduciary standard. As of April of next year, however, all financial professionals who offer investment advice for retirement accounts such as 401(k)s and IRAs will be subject to the standard. As of now, these financial professionals are only required to offer investment advice that is “suitable”—meaning they could technically recommend something that is not the best option in order to earn more on commission.
What does all of this mean for you?
Your financial adviser can inform you on how exactly these regulation changes will affect your investment portfolio, as different investment management specialists will likely handle the new fiduciary rule differently. Changes could be drastic, but chances are the changes will not be monumental for you (especially if you are already doing business with a reputable investment management specialist). In fact, your account may be “grandfathered” in, allowing you to maintain the status quo on how your financial adviser is being compensated for the time being. There may be limitations, however, such as not being able to change your monthly contribution amount once the fiduciary rule goes into effect. Or, you may have to sign a best interest contract exemption (BICE), which indicates that you trust your adviser to make decisions for you that are indeed in your best interest.
If you do have to change your account’s compensation system (or choose not to be grandfathered in), your financial adviser will instead receive a small, consistent percentage of your contribution as compensation. Again, this likely will not feel all that different for you as the account holder. If your investment management specialist has not contacted you about these potential changes to your account, it may be a good idea to get in touch with them just in case.